Breakout

Brazil Preparing for World Cup and Olympics, Still Isn’t Ready for Investors

Jeff Macke
Breakout

Two years ago it all seemed to be coming together for Brazil. Preparations for the 2014 World Cup were well underway and would be quickly followed by the 2016 Olympics in Rio de Janeiro. The soaring price of commodities were funding an unprecedented infrastructure spend that would make Brazil the the shining star of South America.

As it turned out Rio winning its Olympic bid was one of the great opportunities to sell the news in recent investment history. Since October of 2009 the iShares MSCI Brazil ETF (EWZ) has dropped more than 30% compared to a more than 70% for the S&P500 (^GSPC). According to David Garff of Accuvest the promise of a Brazilian revival has been a disappointment on every level.

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"The infrastructure investment didn't happen as fast as everybody thought and they weren't as profitable as everybody thought" says Garff in the attached video. "They aren't really ready yet".

When he says they aren't ready yet Garff is speaking of the venues but he could just as well be referring to the idea of getting long shares of Brazilian companies. They look cheap on paper but for good reason. Four years after winning the right to the 2016 games the current Mayor of Rio is feuding with the federal government over who's going to pick up the tab for operating the venues once the games have left town.

With visions of huge profits having vanished there's nothing but a sense of dread as Brazil readies itself for foreign invasions in 2014 and 2016. If the country can get through the events without mass riots it will be a moral victory, not an investment catalyst.

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Until the momentum turns fundamentally Brazil is best thought of as a cautionary tale. Promises to build out a country's infrastructure can go up in smoke regardless of how "shovel ready" they may seem during the election season. Sometimes politicians make empty promises or simply lack the managerial skills required to implement their plans. At least in Brazil...

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