Emerging markets managers continue to eye Brazil as a value play despite double-digit interest rates, sky-high US tariffs and a presidential election on the horizon.
The Brazilian market suffered a difficult year in 2024 from an equities perspective, falling 29.8% in dollar terms, according to FE Fundinfo data. This year has been brighter, however, with the market rebounding 42.4% so far. Meanwhile, the presidential election in 2026 and interest rate cuts could be catalysts for the market to re-rate further.
“Brazil has been one of our key overweights in 2025,” says Carmignac emerging markets equity fund manager Naomi Waistell. The market’s performance this year has not eliminated the value case for investors, she adds, noting Brazil remains “very cheap”.
With price-to-earnings for the MSCI Brazil index in single digits at 9.3, the market is cheap even in emerging markets terms, with the broader MSCI Emerging Markets index P/E at 16.4.
Fidelity Emerging Markets Limited manager Chris Tennant, another investor with an overweight to the region, adds Latin America “throws up a number of ideas” in terms of the most attractive valuation opportunities he currently sees.
Election catalyst
Investor optimism towards the region remains despite a tough macroeconomic backdrop. A policy conflict between the Lula administration’s expansionary fiscal agenda, which is at odds with the central bank’s restrictive monetary policy to tame inflation, has seen Brazil’s fiscal position deteriorate.
As a percentage of GDP, gross debt currently stands at 91.4%, according to the IMF. This is expected to rise to 98% in 2028. Meanwhile, the headline interest rate (SELIC) has surged to 15%.
Next year’s election, which takes place in October, could be a big shift for the market if there is a resolution to the competing policies.
“I think if a more market-friendly candidate were to win, Brazil could be one of the best performing markets in the world next year,” says Tennant.
“Everyone’s concerned about the fiscal environment in Brazil but if you do have a political change, that can be a big positive catalyst.
“When previous market-friendly political changes have occurred, Brazil has subsequently rallied more than 200% in dollar terms, and the starting point today for the market is much cheaper than it has been historically.
“It’s too early to call the election outcome. But overall, I think the risk-reward in Brazil looks positive.”
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The interest rate hiking cycle has attracted flows to defensive sectors such as utilities.
The FP Carmignac Emerging Markets fund’s ~5-6% overweight to Brazil is an “unusual level”, co-manager Waistell adds, with the main exposure coming from the utilities sector due to its bond proxy characteristics.
“When you have the SELIC so high in Brazil at the moment, you tend to see flows to bonds or equities that have some bond-like characteristics. That’s because of the regular payments and contracted regulatory returns which is what you get in the utility industry.”
She particularly highlights hydropower generation company Eletrobas, which features in the Article 9 fund’s top 10 holdings.
“That has played out incredibly well in terms of performance year to date. At the point we invested in it, we saw such a wide valuation anomaly.
“We’ve seen a very strong move up in Eletrobras, partly because it has announced high dividend payments which reassured investors .As a utility company we value Electrobras by looking at the equity risk premium it offers over and above the Brazilian sovereign yield and this gave us a very clear signal that the stock was mispriced. It is less pronounced now, though the market continues to underestimate the strength of the company’s asset base and the long-term opportunity in Brazil’s energy infrastructure needs.
“However, from this point, it’s probably about casting the net a bit wider and looking at which other names and sectors we should position for 2026.”
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The spike in interest rates has also provided food for thought for bond fund managers.
Adriana Marina-Cristea, senior investment manager for emerging market debt at Pictet Asset Management, says Brazil’s economy has been running “above potential” for a while now, but there are increasing signs the necessary slowdown is now under way, with the Q2 growth rate falling after 5.3% growth in Q1.
While the central bank’s next move is likely to be a cut, she says, policy rates are likely to stay high for a while longer.
“With that in mind and considering the very attractive high rates on offer – particularly in real terms – we like inflation linked bonds and the currency.
“Brazilian Real has been one of the top performers year to date in the emerging market FX space versus the US dollar, and we expect this can continue given the very hawkish central bank.”
Tariffs
Another challenge has been the country’s relationship with the US. Brazil was hit with 50% tariffs in early August, making it one of the hardest hit by Trump’s trade policy at a headline level.
Meanwhile, there has also been tension between Lula’s government and the Trump administration over the trial of former president Jair Bolsonaro.
The tariffs largely hit agricultural products, which forms the heartland of Bolsonaro’s political base, and Lula has seen a modest bump in polls for defending Brazil’s sovereignty.
Despite the issues with the US, Andrew Ness, TEMIT co-portfolio manager, only has low levels of concern around its impact on the investment case.
“Brazil is typically much more internally sufficient on demand,” he says.
“It is noisy, it will affect headline numbers and sentiment and it could affect certain companies. But on aggregate, it strikes us to be more noise than an economic concern. We’re much more concerned about the trajectory of fiscal sustainability.”
Patryk Drozdzik, senior EM macro strategist at Amundi Investment Institute, notes a wide range of exceptions were also granted, including for energy products, aircraft and parts, iron ore, orange juice, among others.
Overall, about 40% of Brazil’s US-bound exports are exempt from these tariffs, reducing the effective tax rate to around 32%, well below the 50% headline.
Drozdzik argues the US tariff policies and other Trump actions are pushing Latin American economies to eventually choose a side, either aligning with the US or with China and the global south after years of maintaining a relatively balanced approach.
“The extent and pace of Brazil’s shift will largely depend on its leadership after the next presidential elections.
“A Lula victory would likely accelerate closer ties with China, while a win by a Bolsonaro ally would probably see Brazil return to a more balanced position in this geopolitical divide.”
Patricia Ribiero, co-CIO global growth at American Century, says the evolving trade dynamics between China and Brazil present significant opportunities for EM investors.
“Closer ties between the trading partners could further expand trade and strengthen supply chains, and because of this strengthening relationship, there is potential for long-term, durable business growth.”
China’s position as the world’s leading manufacturer means it relies on other countries for the raw materials it requires, particularly to produce smartphones, electric vehicles and solar panels.
Brazil has become a key source for many of those materials, with almost 22% of China’s iron ore imports coming from Brazil last year. Crude oil and agricultural products are also key exports to China.
Fiscal sustainability
While tariffs may not be as much of a concern as the headline figure suggests, the fiscal situation remains a major issue for investors.
“Key risks we are watching are related to the evolution of the economy particularly in an election year,” says Amundi’s Drozdzik. “We will be focusing on fiscal developments, watching to make sure the fiscal impulse does not once more turn positive, which would derail the case for disinflation and policy easing.
“Our current defensive positioning via linker bonds allow us to get a good read of the macro setup for the local rates side given the risks. Trading the outcome of the election now would be too soon, in our view. The impact of the recent confrontation with the US is still to be seen in opinion polls for the coming election.
“Therefore, election odds are also on our radar.”
