Brazil comes back into fashion – should you invest?

Brazil remains a good old-fashioned emerging market play, while volatile semiconductor manufacturers distort Asian stock indices. Financials make up 40% of the MSCI Brazil stock market index, with energy and materials combined accounting for nearly 30%. The Ibovespa index enjoyed a thrilling spring as global investors looked for a hedge against surging commodity prices.

While Brazil does import some refined oil products, it is a net exporter of crude oil, say Alex Nae and Tae Yoon Kim for FTSE Russell Insights. The FTSE Brazil stock market index returned 47.2% last year. It rallied at the start of 2026, but remains attractively valued on a 12-month forward price/earnings ratio of 9.5, compared with an average of 12.6 in the wider FTSE Emerging index.

Foreign investors dump Brazilian stocks

Since a peak in April at the height of the Iran war, the Ibovespa has fallen 11%, but remains up 10% this year. Foreign investors pulled 14.9 billion reais (£2.2 billion) from local shares in May alone, the fastest pace in six years, say Raphael Almeida and Leda Alvim on Bloomberg. Foreign capital plays an outsized role in São Paulo, accounting for 60% of trading in Brazilian equities, the highest level in any emerging market.

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The slump reflects two factors. Firstly, the AI trade has distracted investors from commodity plays. Secondly, expectations of higher inflation and interest rates act like a wet blanket on emerging-market equities. Brazil’s benchmark Selic interest rate stands at 14.25%. With east Asian semiconductor firms surging, Brazil’s longstanding pattern of underperformance has re-emerged. The MSCI Brazil stock market index has returned an average of 7.5% annually over the past decade, compared with an emerging-markets average of 10%.

All eyes are on general elections scheduled for 4 October. Incumbent president Luiz Inácio Lula da Silva enjoys a narrow polling lead over Flávio Bolsonaro, the son of former president Jair Bolsonaro. Lula can point to “record low” unemployment and strong annual growth, which at around 3% has “outpaced expectations for three years”, says The Economist. The catch? Brazilian debt is “unsustainable on its current path”, with gross public debt forecast to hit 99% of GDP in 2030. The nominal deficit – “composed almost entirely of interest payments” – stands at a “whopping” 8.1%.

Lavish, constitutionally mandated spending on pensions is to blame. Until that is reformed, “the market will never trust Brazilian fiscal rectitude”. Stronger growth does ease the situation, says Gustavo Medeiros in the Financial Times. But it may take a market panic to persuade politicians that a credible fiscal plan is needed. Still, given Brazil’s “humbling valuations”, it wouldn’t take much good news to make the country a “compelling opportunity”.

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