BRZU For A Volatile Year Ahead In Brazil

Brazil is the most populous country in South America and the leading economic power on the continent; it is the longest country worldwide and the only country with the equator and the Tropic of Capricorn running through its borders.

Over the past years, Brazil has suffered from political and economic scandals, which weighed on its currency, the real, versus the US dollar. In 2018, Brazil elected a far-right leader, Jair Bolsonaro, as President. A scandal removed the previous elected President, Dilma Rousseff, from office.

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

Meanwhile, rising global inflationary pressures lifting raw material prices are inherently bullish for the Brazilian economy. The country will go to the polls in 2022 to decide if President Bolsonaro will serve a second term.

We could see lots of volatility in Brazilian stocks in 2022 as the election and the pandemic’s ongoing effects impact the economy. The Direxion Daily Brazil Bull 3x Shares ETF (BRZU) is a short-term trading product that will rise and fall with the iShares MSCI Brazil Capped ETF (EWZ). During an election year in Brazil, uncertainty looks likely to create lots of price volatility and trading opportunities over the coming weeks and months.

Brazil is a commodities powerhouse

Brazil’s climate and geography make it a significant raw material-producing country. Aside from iron ore, gold, aluminum, crude oil, and natural gas, Brazil is the world’s leading producer and exporter of sugarcane, coffee beans, and oranges. The three soft commodities trade on the Intercontinental Exchange along with cotton and cocoa futures.

Sugar is an agricultural and energy commodity as Brazil processes sugarcane into ethanol. In 2021, Brazil was the tenth-leading crude oil-exporting country. Meanwhile, Brazil was only second to the US in ethanol production.

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

The rise of commodity prices coming from South America’s leading economy is inherently bullish for Brazil.

An unpopular President is up for reelection

Jair Bolsonaro won the 2018 Brazilian Presidential election and became the 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 government spending. His promises to end political corruption and restore security amid a high crime rate won widespread support and the presidency.

While he may have succeeded, the global pandemic caused many roadblocks for his administration. Brazil is third behind the US and India in the number of confirmed COVID-19 infections, with over 22.6 million cases at the end of last week. However, Brazil is second to the US in fatalities as over 620,000 Brazilian perished from the virus. According to the website nCoV2019.live, approximately 77.7% of Brazilians have received vaccinations.

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

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

Chile’s GDP is fifth in South America, behind Brazil, Argentina, Venezuela, and Colombia. Chile is the world’s leading copper-producing country. In late 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 the generational shift in Chile.

President-elect Boric is a socialist and populist leader, urging Chileans to approve rewriting the country’s constitution. The Chilean election could be the beginning of a trend in South America, which would spell bad news for President Bolsonaro’s chances for a second term. Meanwhile, addressing climate change and increased government support for unions could post issues for commodity producers. Moreover, a socialist wave could mean some mines and other production could be nationalized over the coming years.

Three reasons to be bullish on 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 dropped below 20% in late 2021, reaching the worst level of his term in office.

However, rising commodity prices are a reason to be bullish about Brazil’s future.

Three reasons favor Brazil in 2022:

• Higher commodity prices lead to rising corporate profits and increased tax receipts.
• An election year tends to be a time for optimism, even if the government experiences a change in leadership. Going into the 2018 election, the Brazilian real rallied against the US dollar.

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

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

With volatility in the US stock market as interest rates are set to rise, Brazil’s stock market could outperform the US leading indices over the coming months.

Expect lots 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 of Brazil’s top companies, with its most significant exposure to Vale S.A. (VALE), a leading commodity producer. The top holdings include:

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

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

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

The chart shows the downtrend in EWZ that took the ETF from $42.05 on June 7, 2021, to a low of $26.47 on January 5. After falling by over 37%, EWZ recovered to the $29.92 level at the end of last week, a 13.03% bounce.

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

If Brazil continues to recover 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 is only appropriate for short-term trading purposes as the 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 raw material prices, which could lift the country’s leading stocks over the coming months. However, it is likely to be a very bumpy ride, so trading instead of investing could yield the best returns.