To call it surprising is to describe the situation modestly, but the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) is higher by 1.7% today.
Put another way, EWZ, the largest ETF tracking Latin America’s largest economy, is, at this writing, the seventh-best non-leveraged ETF on the day, a day after Brazil’s football team was punished by Germany in the semi-finals of the 2014 World Cup.
Arguably the only thing more embarrassing than the host nation’s 7-1 (that’s right, 7-1 in a soccer game) drubbing at the hands of Germany was the insistence of some “oddsmakers” that Brazil was still the tournament favorite after (that’s right, after) it was reported that Neymar, Brazil’s best player, would not play against Germany.
While Brazil’s World Cup dreams are dashed, some investors apparently do not feel the same way about EWZ. In fact, EWZ’s Wednesday performance puts a dent in the notion that equities in a football-crazed country, of which Brazil certainly is, languish immediately following a loss in a major international tournament.
A 2012 study by the European Central Bank highlighting the impact of the World Cup on trading volumes in football-crazed developed and emerging markets during the 2010 World Cup.
“The survey studied markets in 15 countries, including nine in Europe, four in Latin America, the U.S., and the 2010 World Cup host South Africa. The study showed a sharp drop in trading volumes, not only in emerging markets, but also in developed markets,” according to Emerging Equity.
The median volume drop across all 15 markets was 55% with the U.S. showing a larger decrease (43%) than the nine European markets included in the survey (38%), Emerging Equity notes. A 2007 paper by The Journal of Finance said the “average return on days after an international soccer win is positive (5.0 basis points), but negative and significantly lower on days following a loss (−18.4 basis points).” [LatAm ETFs Could be Boring During the World Cup]
One theory floating around today regarding EWZ’s bullishness is that Brazil’s loss is bad news for President Dilma Rousseff. Rousseff is up for reelection in October and has been previously reported, nearly every time a new poll is revealed showing waning support for her, EWZ and Brazilian stocks rise. [Rousseff Pain Equals Gains for EWZ]
In an interview with Bloomberg, Tony Volpon, head of Americas research at Nomura Holdings, said Brazil’s loss, on home soil no less, “cannot but have major repercussions.”
“However this may play out, we believe that our stated view — that the opposition is likely to win and the market consequences of this — has been reinforced by what can legitimately be regarded, from a Brazilian point of view, as a tragic sporting defeat,” Volpon wrote in a note obtained by Bloomberg.
Commentary pertaining to Brazil’s defeat serving as lightening rod for Rousseff’s eventual defeat does not end there.
“Brazilians might feel that their team’s lack of leadership on the pitch reflects something much bigger — namely, lackluster political leadership at the national level. Their disappointment is likely to be visible quite soon in President Dilma Rousseff’s popularity ratings. With campaigning for the presidential elections set to start shortly, Brazil’s football disaster could well play a role in frustrating Rousseff’s re-election bid,” wrote Mohamed A. El-Erian in a Bloomberg commentary.
So one way of looking at the aftermath Brazil’s World Cup disappointment (hey, there’s still the third-place game) is that a surprising buying opportunity has been created in EWZ and other Brazil ETFs. However, buyers of Brazil ETFs need more negativity to realize profits. That is negativity in the form of glum polling numbers for Rousseff. [Brazil ETF Rallies on Poll Results]
iShares MSCI Brazil Capped ETF
