Brazil is back in style; should you make an investment?

As international investors seek a hedge against rising commodity prices, Brazil continues to be a classic emerging market strategy

While erratic semiconductor manufacturers distort Asian stock indices, Brazil continues to be a classic emerging market play. Energy and materials together account for almost 30% of the MSCI Brazil stock market index, with financials making up 40%. As investors around the world sought a hedge against rising commodity prices, the Ibovespa index had an exciting spring.

According to Alex Nae and Tae Yoon Kim of FTSE Russell Insights, Brazil is a net exporter of crude oil despite importing some refined oil products. Last year, the FTSE Brazil stock market index saw a 47.2 percent return. Despite a rally at the beginning of 2026, its 12-month forward price/earnings ratio of 9.5, as opposed to the FTSE Emerging index's average of 12.6, indicates that it is still attractively valued.

Brazilian stocks are dumped by foreign investors.

The Ibovespa has dropped 11% since peaking in April during the height of the Iran War, but it is still up 10% this year. According to Raphael Almeida and Leda Alvim on Bloomberg, foreign investors withdrew 14.9 billion reais (2.2 billion) from local shares in May alone, the quickest rate in six years. So Paulo has the highest percentage of foreign capital in any emerging market, with 60% of Brazilian equity trading coming from foreign sources.

Two factors contribute to the slump. First, investors have been diverted from commodity plays by the AI trade. Second, emerging-market stocks are negatively impacted by expectations of increased inflation and interest rates. The benchmark Selic interest rate in Brazil is currently 14.25 percent. East Asian semiconductor companies are booming, and Brazil's long-standing underperformance pattern has returned. Over the last ten years, the average annual return on the MSCI Brazil stock market index has been 7.5 percent, while the average for emerging markets has been 10 percent.

The general elections are set for October 4th, and everyone is watching. Flvio Bolsonaro, the son of former president Jair Bolsonaro, is trailing incumbent Luiz Incio Lula da Silva in the polls. Lula can cite "record low" unemployment and robust yearly growth, which has "outpaced expectations for three years" at about 3%, according to The Economist. The problem is that Brazil's debt is "unsustainable on its current path" and is expected to reach 99 percent of GDP by 2030."whopping" 8.1% nominal deficit is "composed almost entirely of interest payments."

The cause is extravagant, constitutionally required pension expenditures. "The market will never trust Brazilian fiscal rectitude" unless that is changed. According to Gustavo Medeiros in the Financial Times, stronger growth does make things easier. However, a market panic might be necessary to convince lawmakers that a sound fiscal plan is required. However, Brazil's "humbling valuations" would make the nation a "compelling opportunity" without much positive news.