"If there is no struggle, there is no progress." - Frederick Douglass
Political change can be more stimulative than all the Quantitative Easing in the world. While central banks can attempt to control the flow of money, longer-term investments ultimately benefit most from structural regime changes, which those in government have the power to enact. Narenda Modi's landmark win in India is proof of this, with India's stocks, as represented by the Sensex Index, surging thus far in 2014 as the new administration allows for more market friendly policies to dominate the country.
I suspect Brazil is about to have its own Modi moment. Recent polls show that Brazilian President Dilma Rousseff has been waning in popularity, resulting in the very real possibility that she does not get re-elected. Dilma has been controversial to many given non-market friendly policies, on-going frustration over inflation, and spending policies that focused on the World Cup rather than badly needed infrastructure for citizens.
Given how much Brazil has underperformed under her administration, it stands to reason a major change in the government could alter investor expectations. Take a look below at the price ratio of the iShares Brazil ETF (NYSEARCA:EWZ) relative to the S&P 500 SPDRS ETF (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/EWZ is outperforming (up more/down less) the denominator/SPY, overlayed with the ratio's 20-day moving average (MA). Note that the ratio appears to be in the early stages of potentially breaking out of its relative ratio range.
The biggest Energy holding in Brazil is Petrobras (NYSE:PBR). It's worth focusing on the price behavior that largely because the state-run company has lost substantial market-cap because of limits on fuel prices forced by Rosseff. The Energy sector overall looks particularly interesting, and is currently our biggest overweight in our equity sector rotation ATAC Beta Rotation Fund (Ticker: BROTX). Take a look at Petrobras and its recent stock price behavior.
With so much overall underperformance and potential regime change, Brazil may end up being the star performer among the BRICS (Brazil, Russia, India, China, South Africa) in the coming years under a new president. While they may have lost the World Cup, investors may be on the verge of winning something much bigger - a long awaited melt-up to come.
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Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
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