Brazil ETF Extends Silva Rally
The iShares MSCI Brazil Capped ETF (EWZ) is extending a rally that has seen the largest Brazil ETF surge 10.4% over the past three months prior to Wednesday.
On the back of more polling data released Tuesday that show presidential candidate Marina Silva continuing to close in on incumbent Dilma Rousseff, EWZ is up 1.8% Wednesday. Tuesday’s poll, published by Brazilian Institute of Public Opinion and Statistics (Ibope) and the second since Silva assumed the mantle for the Brazilian Socialist Party following the death of Eduardo Campos, showed “that Rousseff captured 34 percent of voter intentions, down from 38 percent in the previous Ibope survey carried out earlier this month,” reports Telesur.
Campos perished in a plane crash on Aug. 13. Including Wednesday’s gain, EWZ has surged 9% since Aug. 14 as it became clear Silva, previously Campos’ running mate, would take his place atop the ticket. [Brazil ETF Reacts to Campos Death]
Other recent polls have shown Silva would topple Rousseff if the pair beat Social Democratic candidate Aecio Neves and head to a run-off after Brazil’s national elections in October. Under Brazilian law, a run-off can be averted only if one of the candidates garners more first round votes than the other two candidates combined. [Tepid Reaction by ETF to Brazil Poll Data]
EWZ entered Wednesday with a 20.4% year-to-date, trailing only the WisdomTree India Earnings Fund (EPI) among the four major single-country BRIC ETFs, indicating the idea of a Rousseff loss is more than agreeable to Brazilian financial markets.
Amid a spate of polling data that highlight Rousseff’s vulnerability, investors outside of Brazil are apparently finding the idea of her departure tempting as well. EWZ has hauled in $130 million in new assets in recent trading sessions and there has been brisk activity in the EWZ’s October $56 calls, said Street One Financial in a note out earlier Wednesday.
With Wednesday’s upside, EWZ is flirting with its first close at or above $53 since May 2013. From $53, EWZ would still need to gain nearly 6% for traders to profit on the aforementioned $56 calls.
Still, eager Brazil bulls should note a Silva victory is not etched in stone. Eurasia Group gives Rousseff a 55% chance of reelection, reports Barron’s.
It is also worth noting that Silva’s environmental track record has lifted her in the polls. How long that can be sustained is debatable, particularly at a time when Brazil’s economy is struggling. Brazil’s central bank said earlier this week private sector economists are expecting Latin America’s largest economy to grow a scant 0.7% this year.
By comparison, Colombia’s economy, South America’s second-largest, is expected to grow 4.7% this year while Peru’s GDP is forecast to jump 5%.
Investors and Brazilian voters alike should consider the risks associated with electing an environmentalist at a time of economic strife. There is a template for such moves in the U.S. and it is called California. Hint: California, the largest state economy in the U.S., has significantly lagged the broader U.S. recovery.
iShares MSCI Brazil Capped ETF
