It seems that some of the ‘Fragile Five’ nations (a catch phrase for Indonesia, India, Brazil, Turkey and South Africa) are desperately yearning for a change in their current ruling governments. While hopes of Narendra Modi (President of the opposition party) forming the next ruling government are driving the Indian markets higher, Brazilian equity markets are surging on hopes that the incumbent President Dilma Rousseff will not be re-elected in the October 5 general election.
The Brazilian equity markets, which suffered a bleak 2013, declining in double digits, have been outperforming the broader U.S. equity markets since the start of the year. While the S&P 500 has gained 3% year to date, Brazil’s Bovespa index has added roughly double the figure.
Behind the Surge
The Brazilian markets have continued to maintain their momentum despite the sluggish economy, after a recent election poll (towards the end of last month) showed declining voter support for Rousseff ahead of the elections. Presently, only 37% of the respondents intend to vote for Rousseff against 43.7% in February, according to a Reuters report.
In fact, the current optimism has even lured foreign investors into the Brazilian equity markets. Foreign investors have invested approximately $3.4 billion in the year through May on hopes of Rousseff losing in the upcoming elections.
After growing by an impressive 7.5% in 2010, Latin America’s largest economy saw a decline in its prosperity in the wake of several factors. A sluggish economy, infrastructure bottlenecks and scandals related to state-run oil company Petroleo Brasileiro SA (PBR) are believed to be some of the primary reasons for Rousseff’s rising unpopularity. For example, Brazil’s GDP grew just by 2.3% in 2013, while state-run companies incurred huge losses due to in part to Dilma’s unpopular policies (read: Brazil ETFs in Focus on GDP Contraction: Any Hope for 2014?)
Steep inflation continues to be the main culprit for the country’s woes as well. Brazil consumer prices rose to 6.15% in March – the highest in the past eight months. Brazil’s central bank has made a series of interest rate hikes since last year to contain inflation. From a historic low of 7.25%, the interest rate now stands at 11% in Brazil.
The above factors have driven Rousseff into a tight corner, which ironically is riding the Brazilian equity markets higher. If the President’s popularity continues to decline, the equity markets could jump even higher. Fausto Gouveia, an economist with Legan Asset in Sao Paulo, believes that stop loss trigger operations among short-sellers are expected to provide further fuel to the rally.
Below we have presented three Brazil ETFs, each of which has seen a strong performance in the year-to-date time frame. The rally in these ETFs might continue further as Rousseff is headed to lose office this general election.
Either way, investors should keep a close eye on the following Brazil ETFs as they could continue their volatile trading ahead of both the World Cup, and the elections as well (see all the Latin American Equity ETFs here).
Global X Brazil Financials ETF (NYSEARCA:BRAF)
The least popular fund in terms of asset base has been the top gainer in the Brazilian equity space, returning 16.8% since the start of the year. The fund manages a small asset base of $3 million, charging 77 basis points annually.
The fund tracks the Solactive Brazil Financials Index, providing exposure to the financial sector in Brazil. BRAF holds a basket of 29 stocks, with BancoBradesco, ItauUnibancoBanco and Banco Santander being the top three holdings. The trio form roughly one-third of the fund’s assets, and each has a double-digit allocation in BRAF.
Sector-wise, Financials apart, the fund also provides some exposure to the Real Estate, Consumer Cyclical and Technology sectors.