NEW YORK (TheStreet) -- For many, host-country Brazil is the hands-down favorite to win the World Cup. However, a spirit-crushing defeat for Brazil's team could also accelerate some much-needed changes for the BRIC economy.
At least that's the argument put forward by UBS economists Jorge O. Mariscal and Andreas Hoefert.
"[I]nvestors should see unrest in Brazil as a possible positive for markets -- that is, if it means a more market-friendly candidate beats [Brazilian President] Dilma [Rousseff] in the elections," Mariscal and Hoefert argue in a compelling June 5 report.
They find that unrest in Brazil has grown heading into the World Cup, with citizens increasingly disaffected by the country's uneven economic performance and its high inflation. Many don't believe they've benefited from Brazil's ascendance as one of the most highly-watched emerging economies. Now that growth is slowing, frustration is mounting.
With highly contested presidential elections looming this Fall, UBS argues that investors should not discount the impact of the World Cup on Brazil's political situation and consequently its economy.
They find two reasons for investors to treat the World Cup as a story to watch for Brazil.
"Popular support for the Cup is unprecedentedly low for a country like Brazil, where footballing passion runs deep. The latter underscores the heightened level of frustration of large segments of society with poor infrastructure, lack of public safety, high levels of corruption, and an over-reaching government," UBS states in its report.
"If the World Cup is a failure, short-term socioeconomic sentiment will be bleak. This could spell the end for incumbent president Dilma Rousseff, who is struggling to gather enough votes for reelection," they conclude.
UBS is a contrarian in its argument that an early exit for Brazil could help the country's economic performance. In a late-May report, a team of Goldman Sachs economists found that the country that wins the World Cup generally sees its stock markets outperform in the months after they take the trophy. A runner-up finish, Goldman found, actually creates malaise that can cause markets to underperform.
Overall, UBS's report on Brazil and the World Cup is decidedly pessimistic. "[C]uring Brazil's structural ailments is likely to involve a period of bitter medicine -- no matter who wins on the field or at the ballot box," the firm states. Perhaps, for companies such as Petrobras (PBR) that have struggled to keep up with international competitors, such change would be a positive.
Perhaps financial markets in Brazil will rally if the country is knocked out of the World Cup.
-- Written by Antoine Gara in New York