Buy Brazil With The World Cup And Olympics Looming

Includes: BRAQ, BRXX, EWZ
by: Dave Dierking


With the 2014 World Cup and the 2016 Summer Olympics coming, Brazil is poised to receive a boost to the country's economy and infrastructure.

Brazil's slow growth trajectory could accelerate if incumbent President Dilma Rousseff is defeated in the upcoming October election.

After dropping during the first quarter, Brazil ETFs have rallied since then and some are up almost 30% from 2014 lows.

Several major cities make elaborate bids every few years or so in an attempt to land an Olympic Games. And it's no surprise why. Outside of the prestige that comes with hosting the event, the Olympics brings with it a huge economic impact. It creates jobs as the cities need to prepare the venues and infrastructure necessary to pull off the event and it drives a flood of revenue to the area from tourist dollars.

Brazil aims to experience that economic boom twice in the near future as it hosts the 2014 World Cup and the 2016 Summer Olympics and that makes investments in the country worth a longer look.

The presence of these two mega-events alone, however, is not a reason for buying. The upcoming presidential election in October is throwing a wrench of uncertainty into the picture where the fate of incumbent President Dilma Rousseff hangs in the balance. According to some, a Rousseff loss in the election could help ignite the economy's sluggish recent growth. Rousseff's support is dropping which is providing a level of optimism. Rousseff's re-election could figure to have the opposite effect leaving many investors concerned about Brazil's future direction.

If Rousseff is ousted as many expect and the World Cup/Olympics pairing provides the expected economic jolt, now could be the time to jump on the Brazilian bandwagon.

Broader Brazil ETFs may prove to be the best play as individual stock picking can be hit or miss (not to mention costly). Here are three ETFs to consider for investors looking for exposure to Brazil.

iShares MSCI Brazil (FREE) Index Fund (NYSEARCA:EWZ)

This ETF is by far the largest Brazil fund with over $5 billion in assets and provides the best option for broad Brazilian market exposure.

The fund is well diversified with large exposure to the financial services (20%), consumer staple (18%) and basic materials (6%) sectors - all of which should benefit from the economic boom expected in the area.

Additionally, there is a healthy dose of preferred stocks in the portfolio which helps the ETF maintain a current yield of over 3%.

EGShares Brazil Infrastructure (NYSEARCA:BRXX)

Brazil is going to need to invest millions and millions of dollars into building the necessary groundwork - stadiums, event locations, housing, etc. - in order to properly get these events off the ground. This ETF holds many of the companies that will do the work in building this infrastructure.

This ETF dedicates most of its investment dollars to the utility, industrial and basic materials sectors and, like the Brazil Free Index ETF, has large holdings of preferred stocks to enhance income. This fund's holdings tend to tilt more heavily towards mid cap stocks instead of large caps. This in addition to its sector specificity adds to the potential risk in this fund.

Global X Brazil Consumer ETF (NYSEARCA:BRAQ)

As the name suggests, this ETF holds all of the "basics." This basket of 37 different securities holds food producers, rental car companies and other companies providing everyday products and services that should all see their demand improve.

One caveat to keep in mind here - while this ETF provides solid exposure to Brazil's consumer sector, its asset base is small (around $14 million) and is thinly traded (around 4,000 shares a day) and that could potentially provide a hindrance to entering and exiting positions as well as potentially increasing trading costs.


One thing to keep in mind with investing in advance of country's preparing for an Olympic Games or World Cup is the perceived readiness of these countries to adequately prepare. Recent Olympic hosts like Russia and Greece experienced severe production delays and quality issues and those issues can mute the economic impact. Additionally, one needs to look no further than the recent Beijing Olympics to see how many countries have little to no post-Olympics plan for the use of these new facilities and many are simply left to rot.

But the economic boost that is anticipated to come from these events in conjunction with the optimism surrounding a potential change in government leadership could lead to a boost for Brazilian stocks. After plunging during the first quarter of 2014, Brazilian shares have been rallying in the second quarter amid the optimism.

If the good news comes to fruition, the rally might not be over.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.