Anything and everything Brazil is rallying today as the World Cup kickoff approaches. But the real reason for the rally is not the start of the world's largest sporting event on Thursday. The main catalyst for the recent rally has to do with the declining approval rating for current president, Dilma Rousseff.
The Presidential election is in October. Support for the current president fell to 34 percent from 37 percent this month and an unusually high percentage of voters are undecided, suggesting there is a good chance the incumbent could fail in her reelection bid. Observers perceive a change in Brazil's leadership as boding well for the country's economy, hence the bullish response to the news.
The country is dealing with slow growth (0.2 percent increase in the last quarter GDP) and high inflation. The inflation has led to several interest rate hikes by the central bank. The thinking in Brazil is that if Rousseff does not win the October election, interest rates will start coming back down.
The news regarding the president's approval rating sent shares of the iShares MSCI Brazil ETF (NYSEARCA:EWZ) higher Friday and the rally continued in the new week. In the last two days, the ETF is up 6 percent and not far from the 2014 high. In the last four months, the ETF is up 29 percent.
The ETF is heavily invested in the financials (30 percent) and the consumer staples (16 percent), two areas that will do well with domestic growth increases.
The EGShares Brazil Infrastructure ETF (NYSEARCA:BRXX) is breaking out to the best level of 2014, also boosted by the poll numbers but also the World Cup and upcoming summer Olympics. The country has generated a lot of negative press regarding the infrastructure that will not be ready for the World Cup and that may have had an effect on BRXX the last few years.
Investors that believe the financial sector will be the biggest winner with a change in leadership could consider the Global X Brazil Financials ETF (NYSEARCA:BRAF). The ETF is a basket of 28 stocks in the financial sector. The ETF is up 36 percent from the February low. The one red flag other than being highly concentrated is that the ETF trades a couple of thousand shares per day on average.
The election is a few months away and Brazil will likely take the next couple of weeks off as they celebrate their favorite sport in their home country.
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