ETF Trends
ETF Trends

With 2014 being an election year in Brazil, few, if any, single-country emerging markets exchange traded funds have endured analysis and scrutiny on par with the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ).

With Brazil’s runoff election between President Dilma Rousseff and pro-markets challenger Aecio Neves slated for Oct. 26, investors can expect plenty of action by and attention paid to EWZ, the largest and most heavily traded ETF tracking stocks in Latin America’s largest economy. Some professional investors see more opportunity with EWZ in the weeks ahead and that comes after the ETF tumbled into a bear market in September. [Brazil ETF Inches Toward Bear Market]

“We look at risk-reward,” said Newedge USA Senior Director and Head of U.S. Strategy Larry McDonald in an interview with ETF Trends. “Between Sept. 3 and Oct. 3, EWZ was down 23% or 24%. That showed a Rousseff victory was being priced in, but now Neves is gaining steam.”

McDonald also notes the incumbent Rousseff made a tactical error in working to keep Marina Silva from advancing in the Oct. 5 first round election. Rousseff “miscalculated” in her desire to face Neves, according to McDonald. She got her wish and now she has a very real chance of losing on Oct. 26. Markets are clearly showing the idea of a Rousseff loss is appealing as EWZ has surged more than 10% since Oct. 3, the last trading day before the Oct. 5 election. [Another Neves Surge for Brazil ETFs]

It is not just the idea of a Neves victory that has investors excited; it is some of the people Neves has decided to align himself with. For example, Neves, should he win, will make Arminio Fraga Brazil’s next finance minister.

Fraga, whom McDonald likens to former U.S. Treasury Secretary Hank Paulson, has a pedigree that would make nearly any developed market finance minister or Treasury secretary envious. Aside from holding a degree of Princeton, Fraga is an alumni of George Soros’ famous Quantum Fund and a former hedge fund manager in his own right. Four years ago, Fraga’s Gavea Investments was acquired by J.P. Morgan Chase (NYSE: JPM).

Investors are itching for some positivity out of Brazil’s economy, which contracted 0.6% in the second quarter and is saddled with some of the highest inflation and interest rates in the developing world.

“Fraga has a hall of fame resume for a finance minister,” said McDonald. “If the dollar falls, Neves wins and Fraga comes in, EWZ’s upside could be 20% to 25% over the next year.”

Since Rousseff came to power in January 2011, EWZ has slumped nearly 40%. Making matters worse, Petrobras (NYSE: PBR), Brazil’s state-run oil company and EWZ’s largest holding, is off nearly 54%, making it the worst-performing major global oil stock over that period. [Petrobras Pushes EWZ Lower]

“There are allegations of corruption between Petrobras and the Brazilian government,” notes McDonald. “Many market participants have the perception that the Rousseff government has taken out-sized control of Petrobras similar to the Hugo Chavez’s heavy-handed approach to Venezuela’s oil revenue. When this malaise is lifted with a new free market President, it will likely create substantial upside for equities as a whole.”

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