We’ve all heard that expression about a butterfly flapping its wings in one location, thereby causing a tidal wave in another.
The investment world is witnessing an epic, real-life variant of this phenomenon.
But no butterfly is flapping its wings. Instead, for the last eight months, a dictator in Russia has been flapping his lips, causing a tsunami of investment dollars to inundate countries like Brazil, Norway, Canada, and yes, even the good ol’ U.S.A.
The mass economic exodus by Western companies from Russia is a seismic event that will redirect investment flows and reshape global supply chains for years to come.
This exodus is the final etching in the gravestone of “globalization.” As we talked about in Thursday’s Smart Money, what comes next will be its alter ego: deglobalization.
This is the world’s newest megatrend, and I expect it to be an incredibly powerful one.
As nations move supply chains closer to home, previous manufacturing centers like China will suffer. But China’s pain will be someone else’s gain.
Today, I see an emerging opportunity that is still completely off the radar of most investors. And if history repeats itself, as it so often does, most investors will miss this opportunity just as they missed the last one.
In fact, if past is prologue, an upcoming event could well signal a new “golden age” for these stocks…
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A 10-Bagger in Just Six Years
The opportunity is Brazil, and the potentially significant event is the return of former leader Luiz Inácio Lula da Silva to the nation’s presidential palace. But even if “Lula” does not regain the presidency in the upcoming fall elections, the Brazilian stock market may be offering one of the best buying opportunities since the early 2000s.
Lula’s first administration spanned eight years from the start of 2003 to the end of 2010. Lula, a former union leader, rose to power as an avowed populist who would not necessarily embrace “pro-business” policies. And yet, during his first six years in office, Brazil’s Ibovespa Stock Index skyrocketed an astounding 1,210% in U.S. dollar terms.
It is almost unheard of for a broad stock market index to deliver a “10-bagger” in just six years.
As it turns out, Lula was probably lucky rather than good. He took office just as a powerful commodity super-cycle was about to shower prosperity on Brazil’s resource-focused economy.
From 2003 to 2011, Brazil’s GDP quintupled – from $500 billion to $2.6 trillion. The unemployment rate tumbled from a high of 13% in 2003 to less than 5% a few years later.
But investors were slow to embrace the “new Brazil.” Even though commodity prices had been rising for more than a year before Lula took office in 2003, and even though those rising commodity prices were already starting to boost economic growth, the Ibovespa tumbled more than 60% during the months leading up to the election.
That divergence created a spectacular buying opportunity. Over the ensuing years, the Brazilian stock market prove to be more welcoming than our own – rewarding investors with massive gains when the S&P 500 Index did not.
But then 2011 arrived, and the feijoada hit the fan. The commodity boom turned to bust. Prices slumped for a decade, culminating in the pandemic crash of March 2020.
As commodity prices imploded, so did the Brazilian economy. GDP growth tumbled from a robust annual rate of 9% in 2010 to negative 10.7% in 2020!
During that “lost decade,” almost everything that could go wrong in Brazil did go wrong. As a result of relentless economic and political trauma that pummeled the economy from 2011 to 2020, Brazil’s stock market tumbled to a nearly 15-year low in March 2020.
Now, here’s where things get interesting. From that economic low point, Brazil’s economy has been recovering briskly. GDP has regained its pre-COVID levels, while unemployment has dropped to its lowest reading in six years.
Best of all, thanks to the new commodity supercycle that launched in 2020 – history repeating itself – Brazil is in a macroeconomic sweet spot once again.
And yet, investors have been slow to reward the Brazilian stock market accordingly… just like two decades ago.
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3 Catalysts that Could Boost Profits
Low stock valuations, coupled with robust potential economic growth, are providing ample opportunity to achieve triple-digit gains in the Brazilian market.
Multiple catalysts are already energizing the economy, so the wheels are already in motion. Let’s look at three of the most important…
- Catalyst No. 1: The Commodity Super-Cycle is Booming
Although Brazil boasts an increasingly diversified economy, the country’s prosperity still relies heavily on natural resources like energy, agriculture, and mining.
In other words, what’s good for the commodity-price goose is great for the Brazilian-economy gander. And as you know, commodity prices have moved higher this year, which is unalloyed good news for the Brazilian economy and stock market.
- Catalyst No. 2: Supply Chains Are Shifting Toward Brazil
In January 2018, the Trump administration started slapping tariffs on a variety of Chinese imports. As that U.S.-Sino trade war intensified, many Chinese importers shifted a significant portion of their supply chains from U.S. producers to non-U.S. producers.
Brazil was one of those non-U.S. producers.
Earlier this year, Brazil’s total export volumes hit a new monthly record of $29 billion – lifting the country’s annual export volumes to $300 billion, which is also a new record.
Now comes the Russia-Ukraine conflict, which will not only disrupt global trade in products like oil, but it will also redirect trade toward friendlier regimes like Brazil.
- Catalyst No. 3: The Upcoming Presidential Election
Politics has always been one of the biggest reasons to avoid Brazilian stocks, but it may now be one of the biggest reasons to consider buying them.
Although Brazilians do not go to the polling booth for two more months, Lula appears to be a solid favorite to win. On the surface, that prospect may seem “bad for business,” as it did before. But the economic results of his previous presidential stint provide compelling evidence to the contrary.
A reversal of fortunes is underway in Brazil. The same influences that caused its stocks and currency to fall are now causing them to rise.
From this point forward, even the slightest economic improvement, coupled with the slightest political stability, could power Brazil’s stock market and currency to exceptional gains.
It happened before, and it looks like it is happening again.
Now is a good time to get in for the Brazilian bounce, which is why I recently recommended a new buy to my Investment Report readers. It won’t be immune from the current volatility, but I see much higher prices down the road, and that’s what matters.
Whether you ride along with us (click here to learn how) or not, you would do well to look into what could be the next golden age for Brazil thanks to higher commodity prices and shifting supply chains.
In this case, history repeating itself would be a good thing, and potentially make a lot of money for investors who recognize the opportunity.
Regards,
Eric
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
