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Expect A Short-Lived Olympics Bounce For Brazil ETFs

August 8, 2016 3:22 pm
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Including dividends paid, the iShares MSCI Brazil Index (ETF) (NYSE: EWZ) is up a staggering 66.3 percent year-to-date, easily making it one of this year's best-performing single-country exchange-trade fund.

Amid plenty of controversy, Rio de Janeiro is hosting the Summer Olympics, prompting speculation about whether Brazilian equities and ETFs will get the benefit of an Olympics bounce. Index provider FTSE Russell, one of the largest providers of benchmarks for use by ETF issuers, looked at those prospects. FTSE Russell is not the index provider for EWZ.

An Unbiased Perspective

“Market returns around the 2008 Summer Olympic Games in Beijing, as reflected by the FTSE China A50 Index, and the 2012 Summer Olympic Games in London, as reflected by the FTSE 100 Index, show the host country market rising in the short term but returning to earth after that,” said FTSE in recent research note.

Related Link: What The Rio Olympics Mean For Zika And Favelas

FTSE is the index provider for the CSOP FTSE China A50 ETF (NYSE: AFTY) and the Recon Capital FTSE 100 ETF (NASDAQ: UK).

Past Performances Of Single-Country ETFs Following Olympics

“After falling nearly 40 percent in the year ended July 31, 2008 as Beijing prepared to host the 2008 Summer Olympic Games, the FTSE China A50 Index rose nearly 32 percent the next year, only to fall 28 percent in the following year ended July 30, 2010,” according to FTSE Russell. “After rising just 0.7 percent for the year ended July 31, 2012 as London prepared to host the 2012 Summer Olympic Games, the FTSE 100 Index rose nearly 22 percent in the year following London’s hosting of the Summer Olympic Games, yet gained just 5.3 percent in the year after that.”

Brazil's economic problems (the country is mired in recession), run deep, but this year, global investors have focused more on regime change that resulted in the departure of former President Dilma Rousseff. However, that does not cure what ails Latin America's largest economy.

Among those problems are high inflation that makes it difficult for Brazil's central bank to lower interest rates, which, at 14.25 percent, are among the highest in the world. The central bank there is hoping for inflation of 6.5 percent, but recent data indicate inflation in Brazil is nearly 300 basis points higher than that.

The Vanguard Emerging Markets Stock Index Fd (NYSE: VWO), the largest emerging markets ETF by assets, follows a FTSE index and had an 8.3 percent weight to Brazilian stocks at the end of the second quarter, tying Latin America's largest economy for the fourth-largest country allocation in VWO with South Africa.

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