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Brazil failed to make it to the 2014 FIFA World Cup final but the disaster did not spread to its equity world. Ironically, the biggest Latin American equities ETF – iShares MSCI Brazil Index Fund (EWZ) – added 1.49% the day after the loss (read: Who Wins the 2014 World Cup of ETFs?).

Other Brazilian ETFs like EGShares Brazil Infrastructure Index Fund (BRXX), Market Vectors Brazil Small-Cap ETF (BRF) and iShares MSCI Brazil Small-Cap ETF (EWZS) were also up 1.09%, 1.72% and 0.71%, respectively, on July 9. On July 8, Brazil’s World Cup dream was destroyed by Deutschland as the latter moved on to the final with a 7-1 victory.

Brazil funds in focus

Brazil ETFs have seen lots of ups and downs since the start of the year. Though the first few months were extremely choppy, these products have been heading higher since March-end on hopes that the current president, Dilma Rousseff, will not be re-elected in the upcoming general election on October 5, amid sluggish economic growth (read: Forget the World Cup: The Real Reason Brazil ETFs Are in Focus).

Brazil has been in question for quite some time now for its slowing growth, spike in inflation, high levels of unemployment and excessive red tape in the private sector. To rein in inflation, the country’s central bank has already resorted to a series of rate hikes since early 2013, but instead of any substantial improvement on inflation front, Brazil has only seen diminishing growth levels.

Amid such economic woes, Brazilians took to the streets to protest the World Cup extravagance and Rousseff’s popularity plunged 27 percentage points in June from the year-ago level. Foreign investors expected a change in the Brazilian government after 12 years of the same party, and stocks soared. As a result, EWZ advanced 10.62% so far this year (as of July 9, 2014).

Journey of EWZ during World Cup

However, popularity polls for Rousseff snapped a three-month long losing trend when the World Cup kicked off. The football frenzy and the host nation’s good performance until the quarter-final played their roles in outweighing socio-economic pitfalls in Brazil, though only for a moment, as Rousseff restored political conviction, per a political analyst working for consulting firm MCM.

However, the investing world kept looking for real economic drivers in Brazil and was in no mood to rejoice the popularity gain of a leader under whose guidance Brazil’s economic growth is expected to slide to 1.1% this year.

Notably, Brazil economy grew at 7.5% four years ago. Thanks to this sentiment, EWZ lost about 3.20% (as of July 8, 2014) since the start of the World Cup (read: Can FIFA World Cup Give Brazil ETFs a Kick?).

What Lies Ahead?

Now that Brazil is out of the race to win the title, Rousseff’s failure to speed up economic growth again took center field. Similar to global belief, a UBS analyst also stated that had Brazil won the World Cup, the stock market would have felt a negative impact as it would have increased chances of incumbent President Dilma Rousseff of being re-elected if the protest vote declined.

We believe it is not the World Cup which is driving Brazil ETFs high or lower, it is Dilma Rousseff’s popularity concerns which are regulating the stock markets and the related ETFs. If we go by a recent Bloomberg report, historically, Brazil’s World Cup performances have hardly translated into political victories (read: 3 Latin America ETFs Doing the Samba This World Cup).

Thus, we suggest investors to look at economic fundamentals in Brazil. Also, the imminent election in October could keep the stocks volatile or even push them down in the coming months on occasional news related to Dilma and her opposition.

Bottom Line

We currently have a “Sell” rating on EWZ. However, investors still interested in playing the Brazilian arena can tap small cap ETFs like EWZS and BRF as well as the infrastructure ETF like BRXX with a short-term focus as the trio carries a Zacks ETF Rank #3 (Hold).

No matter how weak the country’s fundamentals are, small caps and infrastructure companies have chances of generating higher revenues out of this soccer event. Long-term investors though are advised to stay on the sidelines and wait for economic stabilization, and more guidance on the political front.

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