Back in August, we talked about how a shift of fortunes is underway in Brazil.
Capitalizing on the deglobalization megatrend, I looked to this South American country as one of the beneficiaries of the mass economic exodus by Western companies from Russia. This is a seismic event that will redirect investment flows and reshape global supply chains for years to come.
And as I said in August…
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…
In that article, I mentioned that one of the key catalysts for the progress of this trend is the return of former Brazilian president, Luiz Inácio Lula da Silva.
And as of yesterday, he has been reelected.
So let’s revisit why this is significant and which Brazilian stocks I believe will benefit from this move…
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A 10-Bagger in Just Six Years
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. 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 proved 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.
2 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 – especially with Lula’s ascent to the president’s chair once again. Let’s look at the remaining two…
- 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.
In June, Brazil’s total export volumes hit a new monthly record of $32.7 billion – lifting the country’s annual export volumes to $310 billion, which is also a new record.
Then came the Russia-Ukraine conflict, which not only disrupted global trade in products like oil, but also redirected trade toward friendlier regimes like Brazil.
Summing Up
Now, since zeroing-in on Brazil in June, the play I picked for this megatrend has increased in value to just above my buy limit – but I am still extremely bullish.
The price of this particular asset has fluctuated in kind with the market over the past several months, but with Lula back on top, I anticipate some calming of the waters soon.
If you’re interested in learning more about this play – and the new ones I’ve just recommended in September and October – click here.
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.
