BRZU for a volatile year ahead in Brazil

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Brazil is the most populous country in South America and the continent’s leading economic power; it is the longest country in the world and the only country whose equator and the Tropic of Capricorn cross its borders.

In recent years, Brazil has suffered from political and economic scandals, which have weighed on its currency, the real, against the US dollar. In 2018, Brazil elected a far-right leader, Jair Bolsonaro, as president. A scandal ousted the previous president-elect, Dilma Rousseff.

While Brazilians had high hopes that President Bolsonaro would revive the country’s business community, COVID-19 derailed the plans as Brazil suffered the third infections and second deaths in the world.

Meanwhile, rising global inflationary pressures driving up commodity prices are inherently bullish for the Brazilian economy. The country will go to the polls in 2022 to decide whether President Bolsonaro will serve a second term.

We could see a lot of volatility in Brazilian equities in 2022 as elections and the continued effects of the pandemic impact the economy. The Direxion Daily Brazil Bull 3x Shares ETF (BRZU) is a short-term trading product that will move up and down with the iShares MSCI Brazil Capped ETF (EWZ). In an election year in Brazil, the uncertainty looks likely to create a lot of price volatility and trading opportunities in the weeks and months ahead.

Brazil is a commodity powerhouse

Brazil’s climate and geography make it an important commodity-producing country. Besides iron ore, gold, aluminum, crude oil and natural gas, Brazil is the world’s largest producer and exporter of sugar cane, coffee beans and oranges. The three commodities are traded on the Intercontinental Exchange along with cotton and cocoa futures.

Sugar is an agricultural and energy product because Brazil processes sugar cane into ethanol. In 2021, Brazil was the tenth largest exporter of crude oil. Meanwhile, Brazil was only second to the United States in ethanol production.

After hitting multi-year lows in early 2020 as the global pandemic gripped markets across all asset classes, commodities produced in Brazil soared throughout the second half of 2020, 2021 and early 2022. Over the past week, frozen concentrated orange juice futures hit a new multi-year high. Crude oil prices reached their highest price since 2014. In 2021, coffee and sugar futures prices reached their highest prices in years.

Rising commodity prices from South America’s largest economy are inherently bullish for Brazil.

An unpopular president is running for re-election

Jair Bolsonaro won the 2018 Brazilian presidential election and became its leader on January 1, 2019. President Bolsonaro retired as a military officer before becoming a politician. He ran on a platform of less government intervention in the economy and pledged to cut taxes and public spending. His promises to end political corruption and restore security amid high crime rates won widespread support and the presidency.

Although he was successful, the global pandemic caused many obstacles for his administration. Brazil is third behind the United States and India in the number of confirmed COVID-19 infections, with more than 22.6 million cases at the end of last week. However, Brazil is second only to the United States in terms of deaths, as more than 620,000 Brazilians have perished from the virus. According to the website, approximately 77.7% of Brazilians have been vaccinated.

After making many promises that the virus has made impossible to keep, President Bolsonaro enters election year 2022 as an unpopular incumbent. In August 2021, the outspoken Brazilian leader said he would be arrested, killed or declared the winner of the next election. Brazilians will go to the polls on Sunday, October 2, 2022 to determine the fate of President Bolsonaro.

The trend in South America could mean a shift from right to left in Brazil

Chile’s GDP is the fifth in South America, behind Brazil, Argentina, Venezuela and Colombia. Chile is the first copper producing country in the world. At the end of 2021, Chile elected Gabriel Boric as its president, and he will take office on March 11, 2022. At thirty-five, he will be Chile’s youngest president. President-elect Boric envisions a greener, fairer and more inclusive future, reflecting generational change in Chile.

President-elect Boric is a socialist and populist leader, urging Chileans to approve the rewrite of the country’s constitution. The Chilean election could be the start of a trend in South America that would be bad news for President Bolsonaro’s chances for a second term. Meanwhile, the fight against climate change and increased government support for unions could pose problems for commodity producers. Moreover, a socialist wave could mean that some mines and other production could be nationalized in the next few years.

Three reasons to be optimistic about Brazil in 2022

Corruption in Brazil gave way to COVID-19 under President Bolsonaro. Many Brazilians reject the current right-wing president, and his popularity fell below 20% at the end of 2021, reaching the worst level of his term.

However, rising commodity prices are cause for optimism about Brazil’s future.

Three reasons favor Brazil in 2022:

  • Higher commodity prices lead to higher corporate profits and higher tax revenues.
  • An election year tends to be a time of optimism, even if the government is experiencing a change in leadership. As the 2018 elections approached, the Brazilian real rallied against the US dollar.

Trend of the Brazilian currency against the US dollar

Brazilian Real vs US Dollar – Monthly Chart

The chart shows that the Brazilian currency fell from $0.23625 against the US dollar in September 2018 to a high of $0.28035 in October 2018, or 18.7% on optimism surrounding the new government.

  • A rising real tends to be bullish for commodity prices and corporate earnings.

With US stock market volatility as interest rates are expected to rise, the Brazilian stock market could outperform major US indices in the coming months.

Expect a lot of volatility in Brazil over the coming year – Trading rather than investing could be the optimal approach

The iShares MSCI Brazil Capped ETF holds shares in many large Brazilian companies, with its largest exposure to Vale SA (VALE), a leading commodity producer. Major holdings include:

EWZ ETF Top Holdings

Top EWZ ETF Product Titles

Yahoo finance

At $29.92 per share at the end of last week, EWZ had $5.079 billion in assets under management. The ETF trades on average more than 23.4 million shares every day and charges a management fee of 0.59%. The annual dividend of $2.77 translates into a yield of 9.26%.

The Direxion Daily Brazil Bull 3x Shares ETF is a short-term trading tool that works like the EWZ on steroids. The fund summary shows:

Fund Summary for BRZU Leveraged Product

BRZU Product Fund Summary

Yahoo finance

At $75.24 per share, BRZU had $225.386 million in assets under management, trades an average of more than 194,000 shares each day, and charges a management fee of 1.33%.

EWZ Brazilian Equity ETF Product Chart

Chart of EWZ ETF

Bar chart

The chart shows the downward trend of the EWZ which took the ETF from $42.05 on June 7, 2021 to a low of $26.47 on January 5. After falling more than 37%, the EWZ recovered to the $29.92 level at the end of last week at $13.03. % bounce.

Leveraged BRZU product that magnifies the EWZ ETF

Leveraged BRZU Product

Bar chart

Meanwhile, the leveraged product BRZU rose from $59.10 on January 5 to $75.24 at the end of last week, a gain of 27.3%.

If Brazil continues to rally on the back of rising commodity prices and an election year, buying BRZU on dips and taking profits on rallies could be the optimal approach for 2022. BRZU does not is appropriate only for short-term trading purposes because leverage comes at a price, time decay.

I am bullish on commodities for 2022 and believe we will continue to see higher lows and higher highs. Brazil’s fortunes are tied to commodity prices, which could push the country’s major stocks higher in the coming months. However, the ride is likely to be very bumpy, so trading instead of investing could yield the best returns.

About Larry Noble

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