This article was originally published on ETFTrends.com.
The election of Jair Bolsonaro signaled a turn from standard politics into the unknowns of anti-establishment, but to exchange-traded fund (ETF) investors, it doesn't matter how polarizing Brazil's new president is as long as the returns keep flowing from the Direxion Daily MSCI Brazil Bull 3X ETF (BRZU) and Direxion Daily Latin America Bull 3X ETF (NYSEArca: LBJ) .
With sectors like technology getting roiled by October’s downpour of volatility, tech-centric ETFs like the Vanguard Information Technology ETF (VGT) and Technology Select Sector SPDR ETF (XLK) were obviously hit hard. However, on the other end of the spectrum, ETFs that have fallen on hard times in 2018 experienced a twist of fate in October, such as Brazil ETFs.
Brazil ETFs' Resurgence
Regardless of the country's election outcome, now the real work begins for Bolsonaro and investors of Brazil-focused ETFs will be keeping a watchful eye, particularly during the early months of his presidency. Thus far, ETFs like BRZU and LBJ have responded positively during the waning days of October.
Both 5-day charts show the ETFs moving above their 200-day averages. As of 3:00 p.m. ET, BRZU is up 6.29% and LBJ rose 8.42%.
While LBJ focuses on Latin America as a whole, the inclusion of Brazil, the largest economy, it essentially becomes the tide that lifts all boats in the countries in LBJ.
Bolsonario’s biggest task is to help extract Brazil from its current economic doldrums, but his election is perceived by market experts as one that leans toward the benefit of the country’s capital markets.
Brazil Leading an Emerging Markets Comeback?
This bodes well for Brazil-focused ETFs like the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ ) and the iShares MSCI Brazil Small-Cap ETF (NasdaqGM: EWZS) . Additionally, for investors looking to obtain emerging markets exposure, Brazil isn’t a bad place to start.
“Emerging markets have really been killed,” ETF Trends Publisher Tom Lydon told Yahoo Finance Live. “Brazil is really quite an anomaly. Most emerging markets stocks and ETFs have been down for the month October. The key thing is if you’re looking for value, a lot of the emerging markets stocks and ETFs that wrap around them are in the single-digit PEs (price-to-earnings ratios)–that doesn’t happen that often.”
The success of Bolsonaro's presidency and Brazil as a whole will weigh heavily on a comeback for emerging markets as a whole going forward. While EM has fallen from grace in 2018 after its bull run in 2017, Brazil's recovery could help lead EM out of its own doldrums.
"Brazil’s longer-term prospects will depend on the new government’s progress in tackling Brazil’s debt dynamics," said Isabelle Mateos y Lago, Chief Multi-Asset Strategist at BlackRock, in a recent blog post . . " The conclusion of the Brazilian election marks the end of a string of contentious Latin American political matches. We remain risk-on and see the lifting of political clouds in emerging markets supporting the long-term case for EM assets."
Real Work Begins for Bolsonaro
Brazilian voters headed to the polls last Sunday and the far-right candidate Bolsonaro emerged as the victor, racking up 55% of the votes to win the presidency of the largest country in Latin America after beating out leftist Fernando Haddad. Bolsonaro's runoff-election victory came after the first round saw him take the early lead with a better-than-expected 46.7% of the votes, while Fernando Haddad came in second with 28.5%.
Bolsonaro is inheriting a bevy of problems he must address during the course of his presidency and the faith of Brazil's populace will hinge upon his success. The economy has been first and foremost on the minds of Brazilians since the country has been slow to recover after it experienced its worst recession to date.
"Bolsonaro’s win heralds big changes for Brazil, whose economy remains in a fragile state despite recovering from a 2015-2016 recession," said Isabelle Mateos y Lago, Chief Multi-Asset Strategist at BlackRock, in a recent blog post. "Brazilian risk assets had rallied since Bolsonaro’s polling prospects started improving ahead of the first round of the election. Yet we see the decisive victory by Bolsonaro–widely perceived as more market friendly than his left-wing opponent Fernando Haddad–as largely priced in by financial markets."
While the annual GDP growth has posted positive gains as of late, it's still not at a level where economists are optimistic about the future growth prospects. Prior to the election, the ideal situation to address Brazil's current financial woes was to elect a president who is market-friendly to help stymie the issues by effecting policies that favor economic expansion and growth--now, they potentially have that in Bolsonaro.
With a much-needed shock to its political system, Bolsnaro could be the solution that Brazil needs and if his policies materialize into an improving economy, the country and Brazil-focused exchange-traded funds (ETFs) will both be beneficiaries.
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