Brazil’s Massive Stock Rally Will Probably End Soon

brazilTom Lydon of ETF Trends takes an interesting look at why Brazil’s markets are unlikely to benefit from hosting the olympics, despite what conventional wisdom would dictate.

Brazil’s markets have already surged in 2016:

Brazilian equities have so far staged a huge rally this year on a weakening U.S. dollar, improving commodity prices and renewed confidence in the government after the ouster of President Dilma Rousseff. The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), which tracks MSCI Brazil 25/50 index of large- and mid-sized Brazilian companies, has been one of the best performing single-country ETFs of 2016, surging 58.6% year-to-date.

However, if the Olympics shines a spotlight on all the problems Brazil has been tackling with and tourists opted to stay home this time around, investors may consider inverse or bearish ETF options to hedge against a potential pullback. For instance, ProShares UltraShort MSCI Brazil Capped ETF (NYSEArca: BZQ) attempts to deliver two times inverse of the daily performance of the MSCI Brazil 25/50 Index.

Even when discounting the potential for a Zika outbreak, crime surge, or other health scare, the odds of further Brazilian gains are small.

Although local stock indexes do tend to outperform global indexes in the year following hosting a Summer Olympics, Brazil’s market is so overheated already that an additional rally is highly unlikely: “Investors who think they might be able to make a quick buck on Brazil during the Olympic events may be disappointed, especially after the recent run up in valuations,” Says Lyon.

The iShares MSCI Brazil Index ETF (NYSE:EWZ) rose to $0.18 (+0.54%) to $33.24 per share in premarket trading Thursday. The EWZ has gained nearly 60% year-to-date, compared with a mere 6% rise in the S&P 500 index.

EWZ-2016-08-04

You can check out Lyon’s full take on the issue here.