Changing of Presidents in Brazil and Trading the EWZ

The presidential election in Brazil is over and Bolsonaro, “the Trump of the Topics,” lost in a close vote to former president, union leader, and left-wing politician, Luiz Inacio Lula de Silva. When a right-wing politician loses to a left-wing politician one commonly expects there to be anti-business policies, for the economy to suffer, and for the stock market to anticipate this and go down. Contrary to expectations, the Ishares Msci Brazil ETF or EWZ went up by a few percent. Here are a few random thoughts about the changing of presidents in Brazil and trading the EWZ.

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What Is the EWZ?

Brazil is far the largest country in South America both by area and population. According to the CIA Factbook, its area is slightly smaller than that of the USA and it has a population of roughly 217 million as of 2022. Brazil is rich in natural resources and is the world’s leading coffee producer, a leading producer of corn and soybeans, and ranks 11 thas a petroleum exporter. The country has a positive trade balance, exporting about $18 billion a year and importing about $2 billion. If you want to buy or trade stocks in Brazil, you can move to Sao Paulo, learn Portuguese, follow the Bovespa index, and buy on the B3 exchange. More easily, you can buy and sell American Depositary Shares of Brazilian stocks. At Top Gun Options we prefer to trade an ETF that tracks stocks in Brazil.

EWZ stands for the iShares MSCI Brazil ETF. Incidentally this index is up several percent three days after election results pronounced Lula as the winner. It’s annual dividend yield runs just under 3% and the ETF has almost $6 billion in assets. This ETF tracks the MSCI Brazil 25/50 Index that provides exposure to both small and large cap companies in Brazil. Thirty percent of this ETF is invested in preferred shares of Petróleo Brasileiro (integrated oil and natural gas), Vale (metals and mining), and ordinary shares of Petróleo Brasileiro.

When Covid ravaged Brazil the EWZ went down until Brazil’s central bank started buying stocks and the EWZ went up. Now the tumult of the Bolsonaro era is coming to an end and Brazil is looking forward to Lula whose previous 8 years in office were the best economically in the history of the country.

Who Is Lula?

Everyone in Brazil knows Luiz Inacio Lula de Silva simply as Lula. When he was president from January 1, 2003 to January 1, 2011 the EWZ went from $8 a share to $99 a share by May 30, 2008 at which point the Financial Crisis took it down to $30. During the rest of Lula’s administration the EWZ climbed back to $77 a share. After Lula left office things did not go so well and by the beginning of January, 2016 Brazil was in its worst recession ever and the EWZ traded for $17. As one might expect, folks in Brazil are hoping for another Lula economic miracle. They apparently are also tired of the craziness of the Bolsonaro era.

Lula is a political powerhouse, a charismatic politician who grew up in a farm family where his parents often did not have enough food for their eight children. The family moved to Sao Paulo when he was 7 and it was here that he dropped out of school to shine shoes and then get a factory job. He became a union organizer and eventually the leader of a powerful metal workers union. In Brazil he has often been compared to Poland’s charismatic Lech Walesa. When he was president from 2003 to 2011 Brazil benefited from the high demand globally for commodities, especially with the rise of China as an industrial power. Lula instituted huge welfare reforms that lifted millions out of lives of poverty and made him a national hero.

Years after he left office Lula was caught up in investigations of kickbacks from the state oil company and spent 580 days in prison. He later was released when courts ruled that due process had not been followed in in and other cases.

Will Lula Help the EWZ Go Higher?

The basic reason for Brazil’s economic surge during Lula’s eight previous years as president was the demand for commodities. Now, with China’s economy cooling off, the zero tolerance Chinese policy for Covid locking down whole cities, it is uncertain if the kind of demand seen previously will return. Nevertheless, the market is excited about the prospects of a Lula presidency and trading the EWZ promises to be both exciting and profitable.

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Originally published at https://topgunoptions.com on November 2, 2022.