UBS Defies Goldman Call for Brazil Rally on World Cup WinJulia Leite
UBS AG and Goldman Sachs Group Inc. both say that Brazil will probably win its sixth World Cup title next month. They have opposing calls on the market’s reaction.
While Goldman cites historical data for past winners to predict a victory for the national team will spark a rally for Brazilian stocks, UBS said in a report today that local politics mean a defeat could spur gains by further eroding the popularity of President Dilma Rousseff’s government.
Brazilian stocks posted the biggest rally among the world’s major stock indexes today after a poll showed declining support for Rousseff ahead of October elections in which she’ll seek a second four-year term. Investors are betting that a new president will interfere less in state-controlled companies such as Petroleo Brasileiro SA, bolstering their prospects.
“If the national team ’crashes and burns’ in the Cup, or if the tournament suffers a major organizational catastrophe, widespread social discontent could ensue,” Jorge Mariscal, the chief investment officer for emerging markets at UBS Wealth Management, wrote. “However, short-term economic pain and anti-Dilma sentiment could be good for financial markets.”
The elections, expectations for a Brazil victory as well as an “unstable” social situation evident in street protests over $11 billion in spending tied to the games, make this year’s tournament especially important for markets, UBS said. In addition to how well the team fares, Rousseff’s popularity could also be hurt by traffic jams and other problems that expose Brazil’s lack of preparation, Mariscal said.
“Investors should get ready to carefully follow developments not only inside the soccer stadium, but also on the streets of Brazil’s largest cities,” UBS said.
Goldman Sachs recommended buying Brazilian assets in a May 28 report, saying history shows a win will boost the country’s stock markets in the weeks after the final.
The victor country’s equity markets outperform global stocks by 3.5 percentage points in dollar terms on average in the first month after winning, “although the outperformance fades significantly after three months,” according to Goldman.
UBS, which looked at the winning nations’ stock markets in local currency terms since the 1974 World Cup, said the winner underperformed global equities in the week after the final in six of eight times, with a median underperformance of 0.7 percent. Considering one-month returns after the World Cup, the median nation outperformed by 0.7 percent.
While the analysts are split on the effect of a win on the country’s assets, they agree that Brazil is likely to get a record sixth title at Rio de Janeiro’s Maracana stadium next month. UBS called the team as the “clear favorite,” joining Goldman, Danske Bank A/S and Unicredit SpA, who all predicted the host team will beat Argentina in the final match.
Rousseff’s support fell to 34 percent this month from 37 percent in May, according to a Datafolha poll published today on Folha de Sao Paulo’s website. All of Rousseff’s challengers together garnered 35 percent, a gap from the front-runner that is within the two-percentage-point margin of error in the June 3-5 survey. To win in the first round a candidate needs to have more than 50 percent support, or more votes than all other candidates combined.
The Ibovespa jumped 3 percent today in Sao Paulo as state-run companies surged after the poll results. Petrobras, as the state-controlled oil producer is known, added 8.3 percent to 17.68 reais, the biggest one-day advance since March 2013.