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What EM Shock? Brazil ETFs Soar on Election Optimism

Sanghamitra Saha
Tilly's (TLYS) closed the most recent trading day at $16.18, moving -0.98% from the previous trading session.

U.S. policy tightening has always been a concern for the emerging market (EM) bloc. This year is no different as rising rate worries and the resultant strength in the greenback took a toll on EM securities. iShares MSCI Emerging Markets ETF EEM lost about 7.8% in the past three months compared with the3.5% gain of the S&P 500.

But things aren’t this dreary for all emerging markets, one such economy being Brazil. Though Brazil's economy recorded much slower growth in the second quarter due to a trucker strike and electoral uncertainty, the country’s current account deficit was much lower at 0.48% of GDP in 2017.

This helped the economy and its market stay relatively steady in this year’s broad-based EM selloffs to some extent. And to make things rosier, the win of far-right candidate Jair Bolsonaro in the first round of Brazil’s presidential election held on Oct 7 boosted the market (read: Are All of 'Fragile Five' EM ETFs Equally Frail?).

 

Presidential Election Optimism

Bolsonaro garnered 46.7% of the votes while former Sao Paulo mayor Fernando Haddad came in second with 28.5%. Both will have a faceoff in the second round on Oct 28. Markets celebrated Bolsonaro’s advance toward the presidency as he supports market-friendly policies and privatization.

The Ibovespa equity gauge jumped 4.1% — the maximum in two years after the election results. Brazilian current real strengthened to a two-month high on election results. WisdomTree Brazilian Real Strategy ETF BZF added about 4.6% in the past two days (as of Oct 9, 2018).

Chances are high that Bolsonaro will win the second round of election, per research houses like Nomura Securities. Talks are rife that Bolsonaro will be able to muster enough support in Congress to pass his agenda, driving the Brazilian market.

Bolsonaro intends to put an end to the rise in crime and “dismantle what prosecutors call the world’s largest political graft scheme,” per Reuters. He has also announced plans to cut taxes, privatize state companies and put a ceiling on foreign ownership of natural resources, per BBC (read: 7 Leveraged/Inverse ETFs Off to a Strong Start in October).

Investors should note that a right-centric mentality is brewing across the Latin America. Of late, it has turned into a popular campaign strategy in Latin America that “don't vote for the left or you will end up like Venezuela” (a country caught up in deep-rooted economic and political crisis), according to BBC. Shares of Petrobras’ PBR — a state-owned energy company mired in corruption — rose 15.6% in the past two days as Bolsonaro is determined to put an end to government corruption.

ETFs in Focus

Below we highlight a few Brazil ETFs for investors to keep an eye on as the second round of elections comes closer. These ETFs have been gaining in the past 10 days and might move even higher if the chances of Bolsonaro’s win get stronger.

iShares MSCI Brazil Capped ETF EWZ — Up 19.6% in the past 10 days

iShares MSCI Brazil Small-Cap ETF EWZS — Up 19.3%

Franklin FTSE Brazil ETF FLBR — Up 18.3%

First Trust Brazil AlphaDEX ETF FBZ — Up 18.3%

VanEck Vectors Brazil Small-Cap ETF BRF — Up 17.9%

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FT-BRAZIL AD (FBZ): ETF Research Reports
 
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WISDMTR-BRZ RL (BZF): ETF Research Reports
 
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FL-FTSE BRAZIL (FLBR): ETF Research Reports
 
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