Key Takeaways
- Brazil is heading towards a pivotal period ahead of its 2026 presidential election. President Lula is seeking another term in office but faces ongoing political and economic challenges.
- China and India’s growth have overshadowed Brazil in the emerging market space. Nevertheless, some successes have been achieved. The country stands as the world’s largest net food exporter and has worked hard to diversify trading partner exposure.
- US trade tariffs have hit Brazil hard. A 50% levy on beef and coffee exports to the US could dampen economic activity and have become a major election issue. President Lula’s position has been strengthened by perceived ‘foreign interference’.
- Despite short-term headwinds, Brazil and other emerging markets remain selectively attractive for investors. We see appealing valuations with other trends adding support.
This week’s update comes from Brazil, whose economy appears to have been left in the slow lane of emerging market growth, overtaken by the rise of China and India. But Brazil is moving into an important period, both culturally and politically. 2026 is shaping up to be a big year with the FIFA World Cup taking place (hosted by Canada, Mexico and the US) with the Seleção (Brazilian national squad) having failed to win the competition in more than 20 years, having done so a record five times in the 50 years to 2002. More importantly for financial markets, we will see a presidential election, which comes at a time when the previous vote is still having consequences.
Brazil’s president, Luiz Inácio Lula da Silva, known as Lula, will seek another term in office in next year’s vote. He will stand against a right-wing candidate yet to be determined. In his first two terms in office, from 2003 to 2010, both Brazil and Lula benefitted from a global commodity boom. He was one of the most popular leaders in the world and a figurehead for the emerging market economies. At the end of Lula’s second term in office in 2010, Brazilian equities made up over 16% of the MSCI Emerging Market Index; squeezed by the rise of China and India, they stand now at just 4.4%.
While the enthusiasm around emerging markets and Brazil has faded since then, many of the trends that caused such excitement remain in place, across commodities, demographics, an emerging middle class and agriculture. Commodities remain cyclical, but Brazil has become an agricultural superpower – a country transformed from a place where hunger was common to the world’s largest net exporter of food. Brazil now has more cattle than people and exported over 3 million tons of beef in 2023.
Brazil has also (wisely as it turns out) tried to diversify their trading partners, with only 13% of exports going to the US, and 28% to China. Turning back to football, Brazil still exports more professional footballers than anywhere else – more than 3000 players in the past five years.
We’re now at a point where politics and trade mix – Brazil has found itself facing the highest tariff of any country trading with the US, which is ironic given that Brazil has a trade deficit with the States. However, on top of the global baseline 10% tariff, President Trump has imposed an additional 40% tariff on Brazil, not because of trade, but because Trump is alleging a ‘witch hunt’ against Jair Bolsonaro, the right-wing former president, who is soon due to stand trial for allegedly plotting a coup to remain in power after losing the election in 2022. A conviction could put Bolsonaro in jail for decades. The perceived interference from the US has boosted support for Lula, who can potentially blame any economic weakness in the lead up to the election not on his inability to pass a budget but on President Trump and his tariffs. Estimates put the impact of tariffs as taking about 0.4% from GDP this year.
Meanwhile, Brazilian beef and coffee will now face a 50% tariff, while orange juice has been exempted – good news considering that Brazilian ‘OJ’ makes up 70% of all orange juice consumed in the US. Brazil is the main foreign supplier to the US of all three of these agricultural commodities and 20% of all beef consumed in the US comes from Brazil.
The duration and scope of these tariffs is very much at the mercy of President Trump, not least given that these tariffs – unlike many others – are not aimed at reducing trade imbalances. Meanwhile, President Lula is not backing down against ‘foreign interference’ as he sees it and is making political capital out of it.
So where next for Brazil? The long-term positive trends remain in place but in the short term, the impact of US tariffs, and the trial of former President Bolsonaro look set to dominate the agenda as the 2026 election moves into view. Our view from the top down remains positive more broadly on emerging markets. While many of the trends and themes that got investors so excited 15+ years ago remain in place, the relative valuation compared to developed market equities, the more positive debt dynamics and in many cases, more conventional policymaking, suggests to us that once again, emerging markets can be a more rewarding environment for investors. This is especially true for those looking beyond a US market that remains beholden to political uncertainty and the fortunes of six or seven mega cap tech companies.
