The countdown to the 2014 FIFA World Cup has begun and Brazil is warming up to host the event from June 12 to July 13 across 12 cities. While such events normally boost the economy, here the case is slightly different. Several Brazilians protested the extravagance on the World Cup that in fact started last year and flared up in the eleventh hour because the nation has so long been lacking basic civic amenities and grappling with slower growth and heightened inflation.
To add to the woes, economists recently lowered Brazil's growth forecast for 2014 while lifting the inflation estimate, as per Reuters . Inflation rate forecast rose to 6.43% from 6.39% in the prior week while GDP growth estimate was pushed down to 1.62% from 1.69%. Brazil has so far been criticized for its dysfunctional economic policies. While higher public spending and tax cuts failed to spur economic growth, excessive red tape in the private sector pulled down Brazilian Growth from its 2010 highs.
Investors should note that GDP growth in this South American nation slipped from 7.5% in 2010 to 2.3% in 2013. The growth forecast for 2014 is even worse, resulting in deeper concerns about one of the pillars of the BRIC nations. Investors naturally lost enthusiasm on the near-term health of Brazil. They are now hoping that the two big global events - FIFA World Cup in 2014 and the Summer Olympics in 2016 - which the country is slated to host, will give it the much-needed chance of a free kick.
World Cup Prognosis
Reportedly , Brazil is shelling out about $US11 billion on the World Cup and $US4 billion on building 12 new and revamping stadiums. The event will attract tourists to some extent at least. The Brazilian Tourism Ministry has approximated that this event will earn around 62.1 billion reais (or $27.7 billion) in revenues.
Prior to this, a smaller sporting event held last year - Confederations Cup tournament -brought home one-third of this estimated revenue. The ministry's website proclaimed that 58% of the total revenue will be distributed to the host cities while the rest will be dispersed in the entire nation.
The tourism sector will benefit the most. Expansion in hotels, demand for airlines, strengthening of several other infrastructure and heavy use of media should give a big-time boost to the related sectors. Brazilian tourism board announced that tourists are expected to spend $ 6.7 billion on this event.
If these numbers are proven right, some incentive to the economy from this event will be obvious. Still, investors should keep in mind that South Africa - the World Cup 2010 host - could not make the most of the opportunity.
The nation garnered only $513 million in 2010 hurt by lower-than-expected tourist arrivals. Only 11% of the $4.5 billion investment was recouped by South Africa in 2010, as per International Business Times . With protests over the soccer event resurfacing in Brazil prior to the tournament, many foreigners might cut back on their trips resulting in lower-than-forecasted revenues (read: Behind the Crash in Brazil ETFs ).
As per sources , Brazil's spending on stadiums has crossed the previous estimate (more than doubled) and is being financed mainly by tax-payers' money. Several analysts believe that in many cases these stadiums or other infrastructure tailor-made for such big soccer events do not have multiple uses and fail to bear fruit when it comes to cost-benefit analysis on a long-term perspective.
Whatever be the case, Brazilians ETFs have been on fire this year despite the lackluster economy, mainly on Dilma Rousseff's chance of losing the general election this October (read: Will Election Hopes Boost The Fragile Five Emerging ETFs? ). The World Cup frenzy cannot be ruled out either. Investors wishing to play the Brazil ETF space can pick from the three choices given below. These ETFs are essentially from the infrastructure and small-cap spaces.
EGShares Brazil Infrastructure Index Fund ( BRXX )
BRXX which should the biggest beneficiary of the event thanks to its sole focus on infrastructure, gained about 11% in the last three months though the fund is down about 4% year to date. The fund took time to pick up as Brazil was delaying on the scheduled infrastructure projects (read: 3 Brazil ETFs Surging This Year ).
This fund tracks the Indxx Brazil Infrastructure Index. Holding 30 stocks in its basket, the fund allocates higher to Cia Energetica de Minas Gerais, CCR SA and Tractebel Energia SA with a combined 15.8% share. From an industry look, alternative energy takes the top spot with 20.9%, closely followed by iron & steel (19%), conventional electricity (12.1%), and transportation services (11%). This $35.4 million fund has a 0.85% expense ratio.
Market Vectors Brazil Small-Cap ETF (BRF)
This fund provides exposure to the small cap segment of the broad Brazilian equity market by tracking the Market Vectors Brazil Small-Cap Index. Notably small-caps are considered the barometer of domestic economic activity.
Holding 77 stocks in its basket, the fund allocates higher to Sul America Sa, Odontoprev Sa and Fii Btg Pactual Corporate Office Fund with a combined 10.6% share. From a sector look, consumer discretionary makes up for one-third of the portfolio while industrials and financials get double-digit allocation in the basket.
BRF has amassed about $167.7 million in assets so far and charges about 60 bps in annual fees. BRF was up about 10% in the last three months and has gained more than 1% from the year-to-date look.
iShares MSCI Brazil Small-Cap ETF (EWZS)
This ETF is also a small cap centric fund and follows the MSCI Brazil Small Cap Index. Equatorial Energia, Mills Estruturas E Servicos De Eng and PDG Realty SA occupy the top three positions in the basket with a combined 11.3% of assets. With respect to sector holdings, consumer discretionary, industrials and financials take the top three spots at 33.29%, 23.7% and 23.6%, respectively.
The ETF invests about $33.9 million in assets in 87 stocks and has 0.61% expense ratio. EWZS gained nearly 13% in the past three months and more than 1% year-to-date.
While these are the best shots at present to leverage the World Cup mania, one can take a look at the largest Brazilian ETF - iShares MSCI Brazil Capped ETF (EWZ) - which has held up pretty well this year, gaining about 7.50% (read: Are Brazil ETFs Set to Take Off? ).
Nonetheless, we currently have a "Strong Sell" or "Sell" rating on the above ETFs and believe this is just a short-term blip. Though Brazil ETFs, especially the small-caps and infrastructure ones, are playing well, losses are inevitable once the football frenzy fades out. Considering the country's weak fundamentals and the chances of not scoring high on promised revenue generation out of this soccer event, the above-mentioned ETFs do bear the risk of a downslide. Thus, investors are advised not to take the midfield while playing the Brazil space.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.