Rioting in the streets? Check. A morally-bankrupt government? Check. An economy on the brink of collapse? Check. Yes, Brazil’s got a lot on its plate right now, meeting all the criteria for what should put a country’s stocks into a group tailspin. Yet, there it is … the iShares MSCI Brazil Index (ETF) (EWZ) was up a whopping 8% as of yesterday’s close, and up 51% since the late-January low when it looked and felt like things couldn’t get any worse.
What gives? After all, little has changed in Brazil over the last couple of months that should theoretically inspire investing in the country’s stocks. If anything, now that the saga has turned violent, one could almost expect EWZ to move even deeper into new-low territory.
But, when you take a step back and think about it, the whole thing makes perfect sense.
The drama from, in and around Brazil has been so incredible it’s almost unbelievable; no synopsis of it could do it justice. But, here’s the (very) short version of the backstory.
When commodity prices were booming heading into 2014, the commodity-driven Brazilian economy was thriving. As they say though, when you live by the sword, you die by the sword. Since Brazil doesn’t do enough of anything else besides export commodities, when they started to tank in 2014, Brazil’s economic engine stalled.
As is the case when consumers and corporations are pressured, the blame game began to be played. This led to closer scrutiny of, well, everyone and everything, which ended up unearthing some pretty juicy — and not on a good way — pieces of information …
… information like the fact that now-former managers of state-owned oil company Petroleo Brasileiro SA Petrobras (ADR) (PBR) were involved in an illegal bribery scandal.
Oh, and as it turns out, multiple state officials have also been accused of involvement in the Petrobras scandal too, or others like it. Even former President Luiz Inacio Lula da Silva had been implicated at one point, raising suspicions about current President Dilma Rousseff, who selected Lula da Silva as her chief of staff.
Exacerbating the lack of credibility in the meantime was Fitch’s downgrade of Brazil’s debt to “junk” status, making it tough for the country to secure much-needed financing. Never even mind the fact that its economy is still shrinking with no real end in sight.
In that light, it’s not surprising many of the country’s citizens are rioting this week, demanding the impeachment of Rousseff. The only surprise is that it didn’t happen sooner.
And This Is a Good Thing for EWZ?
Just to be clear, I’m not making light of a terrible situation by using a cliche to explain why EWZ may well be as buy-worthy as the market has said it is — with dollars — over the past two months. The following cliche is just the most efficient way of making the point in as few words as possible.
That cliche? Baron Rothschild’s advice: “Buy when there’s blood on the streets,” meaning violence typically indicates the end of one phase and the beginning of another. In this case, assuming the protest leads to some sort of change, anything new will be relatively better than the old.
It’s not just the promise of a new government or at least reforms, however, that’s helping to drive EWZ higher. Tumbling commodity prices that hit Brazil particularly hard are also on the mend. Iron ore prices are up 55% since January’s lows. Sugar prices are up 23% since mid-February, reaching new 52-week highs with the rally. Oil prices are higher too, up 38% from early-February lows, and hinting at more upside ahead.
These are all trends that hold tremendous potential for Brazil, which desperately needs a break on at least one front. If it can get two breaks, so much the better.
Bottom Line for EWZ
As for the iShares MSCI Brazil Index ETF, while hope finally abounds, know that owning EWZ right now isn’t an investment in the country’s economic success. Rather, it’s a bet on a premise … that the seeds of political, social and economic change have been planted in Brazil and will grow. Like all seeds, these seeds will probably sprout, but there are no absolute guarantees.
That being said, while EWZ is more of a bet than an investment at this time, it’s also a bet that could easily morph into an investment over time … albeit it a lot of time.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
