Brazil Bears Fade as Lower Rousseff Support Drives Inflow

Bearish wagers on Brazil’s biggest exchange-traded fund sank to a four-month low on speculation President Dilma Rousseff will be voted out of office amid faltering economic growth.

Traders have pared bets on declines in the iShares MSCI Brazil Capped ETF to 11.8 percent of outstanding shares from a record 26.6 percent on April 11, according to data compiled by London-based Markit and Bloomberg. Brazilian ETFs had an inflow of $299.3 million in the week ended June 6, the biggest among emerging markets after India, separate Bloomberg data showed.

The market has rallied as short sellers recede, with the Ibovespa entering a bull market on May 7 amid bets Rousseff will face a runoff in October’s vote. Public-opinion polls published since late March have shown support for her re-election dwindling amid the worst economic performance of any administration since 1992 and above-target inflation.

“There’s been optimism that after the election there’ll be a more market-friendly government,” Audrey Kaplan, the head of international equities for Federated Investors Inc., which manages $366.2 billion in assets, said by phone from New York. “The economy seems to be losing momentum, but after the election we may see an environment that’s more supportive for the markets.”

Federated’s Emerging Market Equity Fund has returned 18 percent in the past year, beating 96 percent of its peers, according to data compiled by Bloomberg.

ETF Trading

The iShares MSCI Brazil Capped ETF jumped 3 percent to $49.25 in New York today. The Ibovespa climbed 2.2 percent to 54,273.16, extending a two-day rally to 5.3 percent, the most since July 2012.

Rousseff’s support fell to 34 percent this month from 37 percent in May, according to a Datafolha survey published June 6 on Folha de Sao Paulo’s website. Senator Aecio Neves of the Social Democracy Party had 19 percent, down from 20 percent, while Eduardo Campos of the Socialist Party fell to 7 percent from 11 percent. The number of voters without a preferred candidate rose to the highest in any election in 25 years.

To win in the first round, a candidate needs to have more than 50 percent support, gaining more votes than all other candidates combined. While the latest polls have showed opposition chances growing, Rousseff has a 55 percent probability of being re-elected, Rafael Cortez, a political analyst at Tendencias Consultoria Integrada, said in a phone interview.

Economic Data

Brazil’s economy expanded 0.2 percent in the first quarter, half the pace of the revised figure recorded for the last three months of 2013, the national statistics agency said May 30. A report on June 6 showed consumer prices increased 6.37 percent in the 12 months through May, compared with the 4.5 percent midpoint of the official target range.

Bearish bets on the Brazilian ETF are still up from this year’s low of 6.4 percent of shares outstanding reached Jan. 10, according to data compiled by Bloomberg and Markit, a provider of financial information. While last week’s flow to Brazilian ETFs was positive, investors have pulled $518.4 million from these funds in 2014, according to data compiled by Bloomberg.

A short sale is one in which stock is borrowed and sold, with the hope of profit by repurchasing the shares later at a lower price.

‘Early Stages’

“We are in the early stages of the presidential campaigns and a lot is up in the air,” Banco BTG Pactual SA’s analysts including Carlos Sequeira wrote in a research note on June 2. “We continue to take a cautious view of Brazil’s equity markets based on the recent macroeconomic data.”

Concern the economy is weakening has also pushed valuations for Brazilian stocks to attractive levels, helping explain the recent rebound, said Alvaro Marangoni, a partner at Quadrante Investimentos Ltda., a Brazilian investment adviser that manages more than 1 billion reais ($444.5 million).

The Ibovespa trades at 10.6 times estimated earnings, or 12 percent below its 12-month average, according to data compiled by Bloomberg.

“The pessimism was a bit exaggerated,” Marangoni said by phone from Sao Paulo. “Now we’re getting a bit closer to fair value. With an administration that focuses a bit more on fighting inflation, markets will improve.”

Before it's here, it's on the Bloomberg Terminal.