SÃO PAULO, BRAZIL - Following a recent visit to São Paulo and Rio de Janeiro by experts from Global X, involving meetings with over 30 companies and on-the-ground research, an optimistic outlook for the Brazilian stock market in 2025 has been presented. Despite local investors' low allocation to Brazilian equities, this is analyzed as a contrarian investment opportunity to acquire high-quality companies at attractive prices. In particular, an active stock selection strategy aiming for returns exceeding the MSCI Brazil Index is expected to be effective.
What is the Appeal of Investing in Brazil?
Global X highlighted four key factors underpinning the attractiveness of investing in Brazil:
Firstly, deep value appeal. The Price-to-Earnings (P/E) ratio of the MSCI Brazil Index stands at 6.7x, which is 33% and 20% lower than its 10-year and 5-year averages, respectively, and close to the low points during the COVID-19 pandemic and the 2016 Brazilian economic crisis. It is noteworthy that despite excessive market pessimism, the MSCI Brazil Index is recording a Return on Equity (ROE) of 16% and a dividend yield of 7.6%.
Secondly, the potential benefit from a weaker dollar. Over the past 22 years, the U.S. Dollar Index (DXY) and the MSCI Brazil Index have shown a strong inverse correlation. For every 1% decline in the dollar index, the MSCI Brazil Index has tended to rise by an average of over 4.5%.
Thirdly, low investor positioning. While local individual and foreign investors have been net sellers of Brazilian stocks, corporate management teams are actively engaging in share buybacks. In 2024, foreign investors net sold 32.1 billion BRL worth of Brazilian equities, and local investors net sold 39.0 billion BRL. This surpasses the buying activity of individual investors and the scale of corporate share repurchases. Notably, local investors have been withdrawing funds from the stock market for nine consecutive months, with 8.9 billion BRL outflows in January alone. However, the increasing share buyback activity amidst this backdrop suggests an interesting entry point.
Fourthly, expectations for reform progress and credit rating upgrades. Brazil has been pursuing ambitious reform agendas in recent years, including state-owned enterprise reform, pension reform, central bank reform, fiscal reform, and tax reform. Credit rating agencies are taking note of these efforts, with S&P upgrading Brazil's credit rating to BB in December 2023. Global X stated that their meeting with Fitch confirmed Brazil's recent growth momentum and significant growth potential.
2025: The Optimal Time for Contrarian Investing?
In its '2025 Emerging Markets Outlook' report released on January 23rd, Global X identified Brazil as its top contrarian investment idea. This analysis is based on the observation that excessive pessimism prevails despite positive economic indicators such as low unemployment, mid-single-digit inflation, and better-than-expected GDP growth. While insufficient government policies in securing fiscal soundness are hindering Brazil's economic potential, this very situation could offer an opportunity to buy high-quality companies at discounted prices.
Global X is paying close attention to the following factors for Brazil investment:
Exchange Rate: The BRL/USD exchange rate falling below 6 BRL in December 2024 could trigger policy changes by government authorities.
2026 Presidential Election: Typically, the market begins to reflect presidential election outcomes 6 to 12 months prior. However, without clear catalysts, the market is likely to focus on the October 2026 elections. Given the current president's health issues and low approval ratings, the emergence of leading centrist candidates with pro-economic policies could signal positive market sentiment.
Interest Rate Hike Cycle: Interest rates, expected to peak at around 15% this year, coupled with an anticipated rate cut cycle in the first half of 2026, could provide strong carry trade opportunities. Historically, during Brazil's seven interest rate cut cycles, the MSCI Brazil Index rose four times, with an average increase of approximately 96.7%. Conversely, the average decline during the three instances of decrease was only about 14.5%.
High Dividend Yield: The MSCI Brazil Index offers a higher dividend yield compared to developed markets, which can serve as an attractive investment factor for investors while they await market shifts.
Why the Active ETF 'BRAZ'?
The Global X Brazil Active ETF (BRAZ) is the only actively managed Brazil equity fund (including ETFs and mutual funds) registered in the United States. BRAZ pursues a differentiated fundamental analysis-driven, concentrated investment strategy, focusing on companies with low leverage, strong management teams, and the ability to generate returns above their cost of capital. The portfolio typically consists of 20 to 30 holdings and consistently maintains a low exposure to state-owned enterprises. This provides investors with an opportunity to reduce exposure to state-owned entities and access non-benchmark stocks.
BRAZ offers competitive fees along with the benefits of the ETF structure, including intraday liquidity, transparency, and tax efficiency. Furthermore, liquidity is determined by the underlying stocks, not just the ETF's daily trading volume or assets under management.
The MSCI Brazil Index has approximately 68% concentrated in its top three sectors, about 26% in its top two holdings, and nearly 48% in its top five holdings. In contrast, BRAZ reduces this concentration and also invests in non-benchmark stocks such as MercadoLibre and ERO Copper, which are listed on U.S. or adjacent country exchanges but generate significant revenue from Brazil. In fact, the total market capitalization of Brazilian companies listed on U.S. exchanges but not on the Brazilian stock exchange is currently similar to the entire market capitalization of the Ibovespa index.
BRAZ's investment philosophy is to identify companies with bottom-up and structural growth drivers, a competitive moat, management aligned with minority shareholders' interests, and clear short-term and long-term growth catalysts. Ultimately, the focus is on finding companies that can consistently generate returns above their cost of capital and compound over time.
BRAZ's investment process follows strict criteria, including quantitative screening, in-depth analysis by sector experts, and risk-adjusted portfolio construction, supported by a team of three professionals with extensive experience in the Brazilian market.
Key Company Visit Insights:
Vivara: The leading company in the Brazilian jewelry market, with a market share nearly three times the combined share of its four closest competitors. It has consolidated a fragmented market based on strong brand recognition and know-how. Its diverse brand portfolio caters to various consumer segments, and growth driven by high-margin brands is expected to improve profitability and Return on Invested Capital (ROIC). As of 2023, Vivara's dividend yield ranged from 1.88% to 3.33%, and its market capitalization is 4.66 billion BRL (approximately 920 billion KRW).
Rumo: The largest logistics company in Latin America and the leading railway operator in Brazil. It is driving volume growth through railway network expansion, fleet modernization, and efficiency improvements, charting a long-term growth story. Particularly in the transportation of agricultural products in central Brazil, its lower cost competitiveness compared to trucking is steadily increasing the share of rail transport.
Conclusion:
Following the Battle of Waterloo, Baron Rothschild famously said, "Buy when there's blood in the streets." With the MSCI Brazil Index trading at a 43% discount to its 10-year average, low equity allocation, and a government with plunging approval ratings, there might indeed be 'blood' in the Brazilian market. However, Global X emphasizes that it is prepared to capture and actively leverage potential rebound opportunities amidst this crisis.
[Copyright (c) Global Economic Times. All Rights Reserved.]
