Brazil’s Economy Analysis
Brazil’s economic growth rate reached 3.4% last year, marking the highest growth performance since 2021. However, the Brazilian stock market experienced a significant decline of 9.7% throughout the year, making it one of the worst-performing markets globally, primarily due to high inflation and high interest rates impacting consumer spending and investment willingness. Nevertheless, this year shows a clear turnaround, as according to statistics from LSEG Lipper as of May 15 this year, the Brazilian stock market has surged by 15.4%, making it a standout performer among global stock markets.
Brazil’s current president Luiz Inacio Lula da Silva is promoting a transformation of the Brazilian economy from reliance on commodity exports to diversification and high-value sectors. He is actively deepening relations with China and other countries and multilateral organizations, hoping to capture more of the Chinese market and attract Chinese investment to help Brazil climb the global value chain. In fact, Brazil and China have long maintained a relatively friendly relationship, but this deteriorated during the term of the right-wing former president Jair Bolsonaro, who followed the U.S. in its anti-China stance. Now that Lula is back in power, Brazil-China relations are rapidly being repaired. Last November, Chinese President Xi Jinping visited Brazil to meet with Lula to commemorate the 50th anniversary of diplomatic relations between China and Brazil. The two sides reached nearly 40 cooperation agreements in economic fields such as agriculture, solar energy, communications, and nuclear energy. In recent years, China has been importing oil, iron ore, soybeans, and other commodities from Brazil and other Latin American countries to reduce its heavy reliance on the U.S. market, providing economic growth momentum for Brazil and many Latin American countries.
Deeper Engagement with China
Trump has restarted the global tariff war, but Lula is undeterred by Trump’s pressure. From May 10 to 14 this year, Lula visited China, marking his sixth visit to the country and his second trip to Asia this year after Japan. During his visit, Lula and Xi Jinping jointly signed multiple agreements covering areas such as mining, transportation infrastructure, and ports, as well as an agreement to purchase jets from Embraer, the Brazilian aerospace company. China has committed to increasing its investment in Brazil, with over $4.5 billion allocated for sectors including automotive manufacturing, renewable energy, pharmaceuticals, and semiconductors. Additionally, President Lula attended the fourth ministerial meeting of the China-Latin America and Caribbean Community Forum and participated in a series of bilateral economic and trade activities, promoting the exchange and cooperation between China and Brazil to new heights. Lula emphasized externally, “We do not need a boss or a world police,” but rather equal partnerships, and he is not afraid of retaliation from the Trump administration for deepening relations with China.
Despite Lula’s efforts to improve governance, Brazil’s economy is currently facing multiple pressures from fiscal, interest rates, and foreign trade. Brazil’s public debt accounts for nearly 80% of its Gross Domestic Product (GDP), and the market is concerned about the widening fiscal deficit. The Brazilian currency, the real, depreciated by over 20% last year, making it the weakest-performing currency among emerging markets. Although Lula is actively promoting new policies, it is difficult to achieve results without resources. Brazil’s current fiscal capacity is insufficient to support the Lula government’s need for further economic stimulus measures.
Brazil Inflation Risk
Secondly, the inflation risk in Brazil remains high. The Brazilian central bank initiated a rate-cutting cycle in August of the year before last, being the first central bank in the world to do so, and within less than a year, it cut rates by 130 basis points. However, the pace of the rate cuts was too rapid, leading to a rebound in inflation. In March, the year-on-year inflation rate in Brazil accelerated to 5.48%, reaching a nearly two-year high. Since last September, the Brazilian central bank has cumulatively raised interest rates by 4.25% to 14.75%, the highest level in nearly 20 years. As financing costs continue to rise, private sector investment and household consumption in Brazil will be significantly suppressed. According to the latest report from the Brazilian central bank in March, under the impact of Trump’s steel and aluminum tariff policies, Brazil’s estimated inflation rate has been revised upward from the original 5.65% to 5.68%. This marks the twelfth consecutive increase in the inflation target by the Brazilian government. The Organization for Economic Cooperation and Development (OECD) predicts that Brazil’s benchmark interest rate may need to be raised by another 1.25% to 1.5% this year to adequately combat inflation risks; however, this could exacerbate the debt risk for private enterprises. The Brazilian government estimates that GDP growth this year will only be 2.01%, and the forecast for next year’s GDP growth has been lowered to 1.7%, which still represents relatively low economic growth. The Brazilian benchmark interest rate (Selic) is expected to remain at 15%, with a potential decrease to 12.5% next year.
Brazil’s Tariff Risk
Brazil’s main exports to the United States include oil, steel, airplanes, coffee, beef, and sugar. Last year, the U.S. had a trade surplus of $300 million with Brazil. Although there was no background for imposing reciprocal tariff measures against Brazil, Trump ultimately imposed a 10% minimum tariff on Brazil. According to estimates from Brazil’s Bradesco Bank, a 10% reciprocal tariff could result in approximately $2 billion in export losses for the Brazilian economy. However, compared to the high reciprocal tariffs of 20% or 30% imposed by other countries, the impact on Brazil is relatively mild, attracting short-term buying interest.
Brazil Funds Performance Analysis
According to Lipper statistics, there are a total of 5 registered Brazilian equity funds available for sale in the domestic market, and 10 Latin American emerging market equity funds. Since the low point of the equivalent tariff on April 9, Brazilian equity funds have achieved an average performance of 6.7%, while their average performance this year has reached as high as 15.8%. Latin American emerging market equity funds have seen an average performance of 9.4% since the April 9 low, with an impressive 15.5% this year. However, both categories of equity funds have experienced a decline of over 20% to even 30% in performance over the past year, making them some of the weakest performing equity funds last year. Due to the relatively weak economic fundamentals of Brazil and Latin America, and the significant market volatility, investors should not allocate too high a proportion of their investments in these funds!
Source: LSEG Lipper, as of 2025/5/19, in TWD
