Brazil, Emerging Markets and the World Cup

There are now less than 2 weeks until the start of the 2014 FIFA World Cup of Soccer, which is the biggest sport event in the world. The event is being organized in Brazil. From an economic point of view, Brazil is one of the BRIC countries; it has underperformed the overall emerging market during the last 4-5 years.  The chart below shows the relative strength of Brazil ETF (EWZ) with respect to the emerging market ETF (EEM).

The ratio has been in a down trend for more than 4 years. We can observe, however, a rebound taking place in early 2014. Some analysts said that this rebound is supported in part by the preparation of the 2014 World Cup of Soccer and the 2016 summer Olympics.

Interestingly, Brazil is the favorite for winning the World Cup this year. It has the highest chance of winning the World Cup, followed by Argentina, Germany and Spain.

The implied probability of winning calculated from the various bookmakers odds is in the range of 20%-25%. A World Cup win can boost consumer confidence and hence the local economy in general. (We saw a similar situation before in 1998 when France won its first ever World Cup at home).

To play a potential recovery in Brazil, one can go long EWZ and hedge the downside with EMM.  If you worry about the negative impact of the host nation’s not winning the World Cup, you can hedge by laying against Brazil on a sport exchange.

Good luck and enjoy the Game!