Monday, July 14, 2014

Brasil Investors Take World Cup Defeat To The Polls

July 14, 2014 9:22 am

Brazil investors take World Cup defeat to the polls

Following its shock 7-1 defeat against Germany last week in their World Cup semi-final, the market value of Brazil’s football squad has fallen nearly R$62m to R$1.3bn, according to a consultancy, Pluri.
By contrast, Brazil’s stock market has risen since the “derrota”, or defeat, with the benchmark Bovespa index ending last week up about 2 per cent to 54,785.93 points. The national team’s further 3-0 loss against The Netherlands on Saturday could add to Bovespa’s gains this week, analysts say.





The reason behind the market’s insensitivity to what was regarded in Brazil as a national tragedy, is speculation that the country’s humiliation on the football field will hurt the re-election bid of President Dilma Rousseff, whose interventionist policies are blamed for undermining the fortunes of key stocks, such as national oil company Petrobras.
“With the defeat of Tuesday, there is suddenly a sense in the market that there could be negative sentiment of the kind that happened in the World Cup of 1950 and this could . . . be reflected in votes,” says Karina Freitas, analyst at brokerage Concordia in São Paulo, referring to Brazil’s defeat in the World Cup final in 1950 to Uruguay on home soil, the memory of which still traumatises the country.
The Bovespa’s volatility comes as the market is bracing for what is expected to be a closely fought election in October between Ms Rousseff and her nearest rivals: Aecio Neves, leader of the PSDB, the main centre-right opposition party, and third-placed candidate Eduardo Campos.
Brazilian elections always coincide with World Cups and usually there is little correlation between one event and the other. But with this year’s tournament occurring on home soil for the first time in 64 years, there was speculation that any hiccups in its organisation could hurt Ms Rousseff’s chances of a second term.
Although until last year she was expected to be a shoo-in for re-election, Ms Rousseff`s popularity began steadily falling in the lead-up to the World Cup amid fears the tournament would be disrupted by protests and the late construction of the stadiums and infrastructure for the event.
With every fall in her popularity, the Bovespa rose a notch. It is now up more than 19 per cent over 12 months. This has been led by state-controlled stocks in which the government is perceived to have interfered the most, including Petrobras, which soared more than 26 per cent compared with a year earlier. Electricity groupEletrobrás is up more than 34 per cent, while bank Banco do Brasil is 38.5 per cent higher.
Instead, however, the tournament proceeded almost without a hitch, exceeding expectations. Ms Rousseff`s popularity rebounded slightly in the most recent Datafolha poll with 38 per cent of intentions to vote as of early July, up from 34 per cent a month earlier. This compares with 20 per cent for Mr Neves and 9 per cent for Mr Campos.

FT Video

Joe Leahy reports after the 7-1 thrashing in Belo Horizonte
Investors are now hoping that the historic defeat may be enough to neutralise this rebound in positive sentiment related to the World Cup and refocus the public’s attention on problems in Brazil’s economy and society as a whole.
“There has already been a growing dissatisfaction over the years with the government,” says Claudio Duhau, an analyst with brokerage Ativa Corretora in Rio de Janeiro.
On the economic front, there is certainly no shortage of bad news. Brazil’s Itau Unibanco has revised down its estimate for gross domestic product growth this year to 0.7 per cent from a previous forecast of 1 per cent and for 2015 to 1.5 per cent from 1.7 per cent.
Inflation, meanwhile, is expected to remain at the top of the central bank’s target range of 6.5 per cent for 2014 and 2015.
“Reports show lower sales in supermarkets and auto dealerships with a sharp decline in June, going back to levels seen in mid-2010,” Itau says. “Industrial production fell for a third consecutive month in May.”
If she wins this election, we could see an inverse movement in the stocks that have so far been responding positively to [Ms Rousseff’s falls in] the opinion polls
- Karina Freitas, analyst at Concordia in São Paulo
But markets may be overstating the belief that the weaker economy will translate into a defeat for Ms Rousseff, who remains popular among low-income earners for her government’s support for minimum wage increases and social benefits.
Unemployment remains close to record lows and despite the weakening economy is not expected to increase sharply ahead of the election because of a shrinking labour force, Itau says.
In addition, voters may place more importance on the successful holding of the World Cup when it comes to the election than the defeat of the national squad, says Ms Freitas of Concordia.
“If she wins this election, we could see an inverse movement in the stocks that have so far been responding positively to [Ms Rousseff’s falls in] the opinion polls.”
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Apologies for the corny footballing metaphor, but I think that, on balance, Brazilians still perceive their economy to be "winning" with Dilma as manager. Yes, as laid out repeatedly in the FT, there are various poor indicators coming in; and watching from the sidelines we can see the long-term folly of Dilma's failure to make the economic reforms the country needs. However for Dilma to be discredited in the eyes of the Brazilian electorate, they need to concede some economic "goals" that will be felt by the public now - specifically in terms of rises in inflation and unemployment.
The length of time between now and the election is probably sufficient to mitigate the impact of Brazil's footballing failure on Dilma's re-election prospects. One can only hope that it will also be  sufficient for at least some of Dilma's economic chickens to come home to roost.

Hi, Libertarian, I do agree: it is the conventional wisdom that the period of time between now and the October elections would mitigate whatever negative impact we would detect from the football failure. But, but, but, politics can have a unpredictable timing arising from its own process. There is a sense of "bad humour", "malaise", "impatience" which is hard to assess and evaluate. This is why I'd put a big question mark on your (and mine, to be sincere) assertion that time would work to mitigate bad impacts. Today I think that the "national"humiliation will sit deep in what we could call (no science, of course) "self esteem" of the electorate. Since Dilma is uncapable to connect, comunicate or articulate in emotional terms, which are important everywhere and even more so in Brazil, I think her party will have a difficult time trying to neutralize the astonishing events of last week.