The World Cup: Betting On Brazil

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Today marks the beginning of the largest, most popular sporting event in the world. As an Englishman by birth I should point out to American readers that this does not refer to the Superbowl or World Series. As much as I have come to appreciate American sports, they have never usurped football (the one played with your foot on the ball, not the “handball” that is known as football in the US) in my affections, nor in global popularity. When it comes to global visibility, the World Cup, which kicks off today in Brazil, is king.

If you believe the media, the event is doomed, but if you believe markets, the 2014 World Cup will from Brazil’s perspective be a resounding success. You can call me an old cynic if you wish, but as somebody with experience in both financial markets and journalism, I would rather trust where people put their money as an indicator than the spin of a journalist looking for a sensational story that will generate viewers, readers or clicks.

Stories over the last few months seem to have focused on all of the problems that Brazil has had preparing for the event and the opposition to it in the country. This is the usual pattern these days with a large sporting event. Journalists, wary of being seen as cheerleaders for a popular event, go out of their way to look for negative stories. Protesters in the streets and unfinished stadia are more sexy news than “everybody’s looking forward to it” and “everything’s going to plan”.

The fact is, though, that FIFA (football/soccer’s governing body), despite warnings only a month or so ago, have declared all venues ready. The World Cup will, of course, go ahead as scheduled. As for the much publicized protests, everybody has used the spotlight to draw attention to their plight and political grumblings.  The protests are centered on the event, but seem to be more about President Dilma Rousseff’s declining popularity that anything to do with the tournament itself.

The markets, maybe with an eye to the possibility of an administration change in October’s presidential election, have ignored all of the negative reporting and have assumed that once underway the event will be beneficial to the Brazilian economy. This can be seen in the performance of the iShares MSCI Brazil ETF (EWZ) since the beginning of February.

 

It may look as if all of the value has gone from buying EWZ, but from a longer term perspective it can clearly be seen that the ETF still has plenty of upside. Take a look at the 5 year chart.

 

There is still plenty of room for gains, possibly to the $80 level, but for that to occur there has to be some economic catalyst in Brazil. The World Cup itself, with the accompanying infrastructure investment, will no doubt help, but the real benefit may come longer term with the outside interest generated in the economic and political problems by the protests surrounding the event. Given that publicity it is likely that whoever wins the presidency in October’s election will focus on the biggest problems of corruption and excessive bureaucracy. Whether they will be able to effect real change remains to be seen, but the effect of the prospect of such change can be seen in India since Modi’s election.

As the actual football starts in Brazil it is likely that, assuming no serious security lapses, the negative stories will fade and the focus inside and outside the country will shift to the possibility of a fresh start and a serious attempt to tackle the political and economic problems that the country faces. It is that prospect, rather than any direct economic impact from the World Cup or confidence boost that a Brazil win might cause, that convinces me that EWZ is a good long term bet; certainly, though it pains me to say it, a better bet than England winning the World Cup.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , ETFs , Stocks

Referenced Stocks: EWZ

Martin Tillier


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