Rio de Janeiro, Brazil's sultry city in the sun, is scheduled
to host the World Cup in 2014 and the Summer Olympics two years
later. In theory, that should be excellent news for the EGShares
Brazil Infrastructure ETF (NYSE:
). In reality, the EGShares Brazil Infrastructure ETF and Rio
could be poised to disappoint investors and Brazil itself.
The state of Rio de Janeiro, like so many U.S. states, is
facing a cash crunch. Brazilian politicians recently voted to
give $2 billion in oil royalties to the state, but Rio needs
$13.5 billion for stadium and transportation (read:
according to Bloomberg
Rio Governor Sergio Cabral told Bloomberg his state is at risk
of financial collapse and if that happens, "we are going to close
our doors. We won't do the Olympics, we won't do the Cup."
Such dour rhetoric could plague BRXX, which has struggled
since inception. Again, in theory, BRXX should have soared since
its debut in March 2010. By the time BRXX came to market, Brazil
had already been awarded the World Cup and Summer Olympics. Last
year, Bank of America-Merrill Lynch predicted emerging markets,
including Brazil, would
spend $6 trillion on infrastructure projects over
the next three years
All of those factors should have contributed to more upside
for BRXX. That has not been the case. The ETF is up just 3.7
percent since its debut and is down 5.6 percent in the past year.
To be fair, BRXX has outperformed the larger, more popular
iShares MSCI Brazil Index Fund (NYSE:
) over both time frames. In 2012, BRXX has also been the superior
However, BRXX does a have a history of not responding to
bullish Brazilian infrastructure news in the fashion investors
hope for. Recent history indicates as much. In August, Brazilian
announced a $66 billion infrastructure stimulus
. That is the largest such program in the history of Latin
America's largest economy, but since August 8, BRXX has slid
almost 4.5 percent.
To be sure, BRXX should not be written off. The ETF yields
almost 4.7 percent and its price-to-earnings ratio of 12.4 and
price-to-book ratio 1.7 imply the fund is more favorably valued
than EWZ. Plus, it is worth noting Brazil is not the first World
Cup to be warn it may not be able to follow through on its
hosting obligations due to infrastructure project delays.
In 2010, there was scuttlebutt that FIFA, the international
governing body of the sport Americans know as soccer and the rest
of the world calls football, was prepared to move the World Cup
from South Africa to the 2006 host nation of Germany. Ultimately,
South Africa would host tournament.
In other words, hope is not lost for Rio and BRXX, but
investors would do well not to expect much until the state
procures the necessary funding to move forward with the
aforementioned stadium and transportation projects. Then, the ETF
might be a "buy the news" trade.
For more on Brazil
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