As global markets navigate heightened uncertainty from trade wars to shifting monetary cycles, Brazil stands out as an emerging market that shows promise. While no country is immune to external shocks, Brazil offers a compelling investment case underpinned by macro resilience, improving relative competitiveness, and strong sector-specific opportunities.

Insulated from Trade Turmoil

Brazil’s trade exposure to the U.S. is limited at only approximately 12%¹ of its exports, unlike more export-reliant economies in Asia. Brazil’s baseline tariff of 10% is comparatively more favorable than the broad new U.S. tariffs imposed on countries such as China and Vietnam and Its energy exports, including oil and oil derivatives, are largely exempt from U.S. tariffs.

Brazil may be a dual beneficiary from the U.S. – China trade spat. It could gain manufacturing and export market share as global supply chains shift away from high-tariff regions; and as a key global player in oil, soybeans, iron ore and meat, Brazil is also likely to benefit from demand for its exports from both U.S. and China.

Resilient Domestic Economy

Despite global headwinds, Brazil's economy is holding up well with 2025 GDP forecasted to grow at +2.3%.² Credit and fiscal expansion have softened the expected slowdown, and private consumption remains strong due to a tight labor market. Disinflation is gradual, but Brazil is benefiting from being a domestic focused economy that is relatively shielded from global trade volatility.

That said, Brazil’s fiscal dynamics remain a key consideration. The country continues to run a high public debt burden, and structural rigidities in government spending limits flexibility. As the country heads into 2026 general elections, any indication of a shift towards a reformist fiscal policy could improve investor sentiment on Brazil.

Rotation Back to Equities

Brazil’s inflation is currently elevated from its central bank’s target inflation rate, but is expected to decline from 5.6% in 2025 to 4.4% in 2026.³ Many strategists are now expecting interest rate cuts by Q1 2026.³ Moreover, Brazil is likely to be the only major global central bank to start cutting rates. Rate cuts could have major implications for the country’s economic growth as approximately 60% of its debt (mostly corporate) is linked to the Selic, the central bank’s policy rate. An ease in monetary policy could spur growth in the corporate sector, consequently lifting the economy. We believe this has the potential to drive a large stock market rotation into equities and investors have barely begun to price in the upcoming rate cuts.

Attractive Valuation and Low Correlation to U.S. Assets

The interest rate and election cycle are typically top of mind for most investors. These investors may be overlooking Brazil’s double valuation discount on both the equity market and currency. We see valuation and FX as the two major positive drivers of the stock market this year in a reversal of last year’s trend.

FX & Valuation Driving Returns This Year

Source: Bradesco BBI Research. Data as of 5/7/2025. Past performance is no guarantee of future results.

PE: Price to Earnings Ratio, FX: Foreign exchange rate, EPS: earnings per share, USD: U.S. Dollar.

Given Brazil’s market history of high inflation and real interest rates, value has typically been the best performing investment style over the long run. The local Ibovespa index is under 9x P/E, hovering near 10-year lows to its historical valuation band and may offer an attractive entry point.⁴

IBOV 10-Yr P/E

Source: VanEck. Data as of 5/31/2025.

IBOV: IboveSpa, is the benchmark of Brasil Sao Paulo Stock Exchange.

P/E: Price to earnings ratio.

BRL vs Peers^* and USD

Source: Bradesco BBI as of 5/7/2025. ^*Peers: AUD, CLP, COP, MXN, ZAR.

BRL: Brazilian Real, AUD: Australian Dollar, CLP: Chilean Peso, COP: Colombian Peso, Mexican Peso, ZAR: South African Rand, DXY: U.S. Dollar Index.

Similarly, the Brazilian Real (BRL) appears undervalued at these levels. BRL is one of the cheapest of major emerging markets currencies and at a discount to its long-term average real equilibrium exchange rate,⁵ which incorporates economic fundamentals such as inflation, productivity, and trade flows. In addition, currently high BRL yields and potential upside has made Brazilian assets more attractive to global investors.

The correlation of the Brazilian stock market from the S&P 500 to U.S. Treasury yields and the U.S. dollar is very low and has been becoming less significant over time. This reflects the independent nature of the Brazilian macroeconomic outlook. At these levels, Brazilian equities provide attractive value for investors looking to diversify their U.S. exposure.

10 Year Correlation Ibovespa to U.S. Assets

5/31/2015 – 5/31/2025

Source: Morningstar Direct. Data as of 5/31/2025.

Sectors Likely to Benefit

Ibovespa has rallied 13.9% YTD,⁶ with financials leading the market recovery led by banks such as Itau Unibanco Holding.^* Itau has posted strong earnings and high ROE as it benefits from high net interest margins. Exempt from tariffs, the Energy sector also enjoys strong USD-based earnings and looks poised for upside too. Trade rerouting tailwinds could also lift Agricultural and Materials sectors. In our opinion, domestic focused growth names with solid fundamentals within the Consumer Discretionary and I.T. sectors remain top picks.

JSL S.A.,^* the largest logistics company in Brazil with a leading market share across 16 industries, is likely to benefit from consumer demand pickup as interest rate cut expectations grow. Another domestic name, Rede D’Or Sao Luiz SA, Brazil’s largest hospital operator and health insurance provider stands out with its strong balance sheet and a healthy growth trajectory. LATAM’s leading fitness chain, Smartfit^* also appears attractive at current levels. Smartfit’s minimal trade exposure and positive operating leverage make it a good pick.

Companies operating in consumer and technology sectors overlap and are likely to benefit from a bullish sentiment on Brazil. MercadoLibre,^* a standout in the Latin American technology sector, has demonstrated strong growth in e-commerce, fintech, and logistics, remains our favorite. We are also positive on Nubank,^* one of the fastest-growing digital banks in the region. Nubank has a scalable platform and an opportunity to expand market share in a large underbanked market.

VanEck Emerging Markets Fund Portfolio Positioning

Source: VanEck Research. Past performance is no guarantee of future results. The reader should not assume that an investment in the securities identified was or will be profitable. Not a recommendation to buy or sell a security.

Strategic Exposure to Brazil Looks Timely

While fiscal fragility, political uncertainty, and inflation volatility remain key concerns for investors in Brazil, we believe the risk-reward skew in Brazil is increasingly attractive. Compared to other EMs, Brazil has better relative positioning in global trade and a strong domestic focused economy. While selectivity remains key, investors seeking exposure to high-quality, undervalued, and structurally sound companies should not overlook Brazil equities.

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