Last July, investors were worried about Brazil's fate after Donald Trump threatened tariffs of up to 50% against it. Turbulence quickly forgotten, because the São Paulo market has since picked up with a vengeance.
For good reason. While Brazil is volatile and therefore not suitable for everyone, this market is worth a visit for less risk-averse investors.
Lula and Trump: Really So Different?
In July, Donald Trump announced additional tariffs for Brazil, up to 50%. His grievances against the country are numerous: it is a pillar of the BRICS, which does not hide its desire to do without the U.S. dollar in trade.
There are good relations with China. There is an economy that follows a state model very different from Argentina's under Milei, and therefore hostile to Trump's ideas. And finally, there is the legal trial against former Brazilian President Jair Bolsonaro (a loyal admirer of the American President), perceived by the Trump administration as a witch hunt. The current situation is going badly between Washington and Brasilia.
Nevertheless, we must face the facts: protectionist tendencies, the desire to develop local production to replace imported products, and the desire to speak to workers in old industries are common priorities for Trump and Lula.
Great assets eased adaptation
Such an increase in tariffs would have been a significant problem for many countries. But Brazil has adapted to it rather well.
The nature of trade between the two countries has a lot to do with this: Brazil exports less to the United States than it imports from the United States. The impact of the new U.S. tariffs is limited.
Secondly, the economic situation is relatively favourable in Brazil: the rate cuts in the United States are good news for emerging countries, which are financing themselves at lower costs.
The weakness of the U.S. dollar is also favourable to them because it makes imported goods cheaper (denominated in USD) and helps to limit inflation.
Add to this a credible monetary policy and a central bank that has done everything to stabilise the Brazilian currency. Since the beginning of the year, the latter has been stable against the euro and is recovering against the dollar.
In addition, Brazil has the necessary assets to play a huge geostrategic game. The world's 7th largest oil producer, it is self-sufficient in energy. It is therefore less exposed to the vagaries of this market.
But the country's complex social context should also be noted. Violence may even affect the economy, as the early closure of companies during yesterday's police operation in Rio demonstrates.
A promising relationship with China
Its links with China are flourishing. When the latter sought to do without American soybean production to put pressure on the White House in trade negotiations between the two countries, it turned to Brazilian production.
At the same time, when Ford chose to close two of its production units in Brazil, it was in China that Lula looked for a buyer. Successfully. Today, it is the Chinese company BYD that operates one of these factories, opening the door to this vast market.
Of course, these close ties between the two countries are not likely to reassure the United States. But the White House is getting used to it. Brazil has the world's second-largest reserves of rare earths, behind China's. The United States knows full well that the country is ideally placed to supply it with these scarce resources, if necessary.
The same goes for Europe, which, after decades of procrastination, has finally signed a trade agreement with Mercosur, the South American common market. With overall weak domestic demand in Europe and significant barriers to access to the U.S. market, European exporters are looking to South America, particularly Brazil, to fill the demand they lack elsewhere.
Recognised companies
Beyond trade relations and geostrategic balances, it must be recognised that Brazil is credible in a series of sectors.
If it has become practically self-sufficient in energy, it is partly because Petrobras has developed know-how in deep-sea oil resources.
Among emerging countries, China is developing skills in civil aeronautics, but Brazil already has Embraer, which has unique experience in this area.
In other areas, such as agri-food and fintech, Brazil also offers its share of players whose impact extends far beyond its borders. Coming out of nowhere, Nu Holdings, the Brazilian fintech available throughout Latin America, has become the country's largest market capitalisation, ahead of Petrobras and Vale.
Interesting but volatile market
This illustrates the sometimes surprising nature of this market, which has risen by around 18% since the beginning of the year (prices and dividends, in €). Promising, it is not expensive (the MSCI Brazil trades at around 9x earnings) and is generous, with a dividend yield exceeding 6%. On the other hand, it is one of the most volatile equity markets in our investment universe for two very different reasons.
On the one hand, Brazil is one of the most indebted BRICS, with public debt of around 74% of GDP and, above all, a costly financing of that debt: the average rate exceeds 11.6%.
Brazil, therefore, suffers from a very high debt burden, which reduces the State's room for manoeuvre and makes this market highly susceptible to developments in the interest rate and foreign exchange markets.
On the other hand, Lula is far from being in step with investors, and some of the measures he defends would further increase the country's public debt, raising investors' fears. For these reasons, we reserve the purchase of Brazilian equities only for investors who are not very risk-averse.
Brazilian bonds: be aware of depreciation
Outside our portfolios, Brazilian government bonds may be suitable for those seeking a high-yield bond investment. At 13.8% for the 10-year rate, Brazilian debt offers attractive yields.
However, we must be aware that the real could well depreciate against our currency. Although it has changed little against the euro since the beginning of the year, inflation in Brazil is higher than in the euro zone. The real's purchasing power is eroding faster than the euro, which is likely to weigh on the Brazilian currency sooner or later.
Interesting in absolute terms, the real returns for the euro-based investor are therefore likely to be lower than those to which they could claim simply by looking at the reference rate.
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