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How To Make Money in Brazil’s Bear Market

Brazil

In late 2017, popular congressman and Brazilian clown Tiririca made an astonishing announcement that he would not run for re-election after seven years in office. The reason Tiririca gave for his disinterest was just as unexpected as the announcement itself: He was fed up with his fellow politicians, half of whom were under investigation for graft.

The congressman’s sentiments might have struck some as clownish anguish. But in reality, they captured the general mood of disillusionment pervading Latin America’s largest economy. Strikes and political bickering have become rampant in the country, almost slamming the brakes on an economy that was just emerging from a brutal recession.

Most Brazilians share Tiririca’s sentiment and are fed up with rampant gun violence and corruption in their country. A former army captain and far-right candidate, Jair Bolsonaro, is spearheading a large movement against the corrupt government, and seems to have earned the support of the vast majority of Brazilians.

Amid all the political turmoil, the flagship index of the Brazilian stock exchange, the Bovespa Index, has taken a beating, plunging nearly 20 percent from its all-time high.

(Click to enlarge)

Source: Google

But just as is the case with many markets, there are a couple of instruments that investors can use to make money off sinking Brazilian stocks. Here is the most popular for shorting the broad market:

ProShares UltraShort MSCI Brazil Capped (BZQ)

ProShares UltraShort MSCI Brazil is up 42.4 percent in the year-to-date and close to its 12-month high. Related: Uber Heads Back To London After Regulatory Victory

The fund is designed to give investors twice the inverse performance of the underlying equities (MSCI Brazil Index), which means that the more the shares sink the higher it climbs. The fund holds 79 stocks in its basket which are nicely spread out among various sub-sectors. Financials have been given top priority with a weighting of 27 percent followed by Consumer Non-Cyclical with 24.4 percent; Basic Materials make up 16.6 percent of the benchmark while energy brings up the rear with 11.5 percent. The fund mainly focuses on large caps.

Its main drawback is that it’s quite small, with total Assets Under Management (AUM) of $33.8 million. Average trading volume is 21,689 shares (current share price of $66.75), which is fair enough. The product charges 95 basis points in fees, about average for the industry.

Brazil’s Political Outlook

When investing in BZQ, it’s important to remember that any positive changes in the Brazilian political and socio-economic outlook will be reflected in the product in the form of magnified negative performance. This can quickly wipe out even relatively strong gains. It’s therefore important to closely monitor developments in the country.

Elections in the country are due this October, and Bolsonaro is the hot favorite to carry the day. After all, he is revered in Brazil, seen as a symbol of hope and a representation of law and order in a country close to anarchy. But is he necessarily a better choice than the unpopular incumbent, Michel Temer?

The people’s idol is hardly a saint either, and has been christened “Trump of the Tropics” and the ‘‘most repulsive politician in the world’’ by the western world for a reason: He is highly controversial, openly supports dictatorship and has even been accused of insulting women.

Is that good for Brazil, or more importantly, the Brazilian economy? Go figure, then place your bets accordingly.

By Alex Kimani for Safehaven.com

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