Brazilian equities are breaking out of their long-term downtrend vs. the U.S.
Brazil will hold a runoff vote later this month to decide its presidential election.
Brazil's presidential election is powering optimism in the country's stock market - and capturing the attention of investors wary of having too much exposure to artificial intelligence in the U.S. stock market.
The Bovespa index BR:BVSP, a benchmark for Brazilian equities, appears to have broken out from its long-term downtrend versus the S&P 500 SPX. The Brazilian index has jumped 12.2% this month through Friday, when it ended at a record peak to notch its biggest weekly percentage gain since April 9, 2020, according to Dow Jones Market Data. That's compared with a roughly 2% gain for the S&P 500.
FactSet, MarketWatch
The Brazilian stock market surged on Oct. 5, the day after the country's first-round of voting for its presidential election resulted in right-wing candidate Flavio Bolsonaro coming out ahead of left-wing incumbent Luiz Inácio Lula da Silva, but with neither winning a majority of the votes. Whereas elsewhere in emerging markets, the race to build out AI infrastructure has fueled stock-market gains as well as worries about concentration risk, Brazil may provide equity investors a way to diversify internationally.
"Brazil represents a good way to diversify away from the AI trade," said Arjun Jayaraman, a portfolio manager for emerging-market equities at Causeway Capital Management, by phone on Monday. "Fiscal reform is the No. 1 issue" behind the recent surge in the country's stock market, he noted.
Investors anticipate that Bolsonaro will win in the runoff vote in late October and implement fiscal policies to reduce the country's deficit, which could lead to Brazil's central bank lowering interest rates and stronger economic growth, according to Jayaraman. Financial stocks, as well as the country's energy sector, stand to benefit under that scenario - two areas making up a large part of the Brazilian equities market, he said.
"Brazil could continue to reprice higher on expectations of fiscal improvement," said global equity-derivatives strategists at J.P. Morgan in a report on Monday. "Financials outperformed after first-round results."
A J.P. Morgan index tracking Brazil's financial stocks has recently surged around 25% since those first-round results - widely beating the country's broader equities market as gauged by the iShares MSCI Brazil ETF EWZ, the strategists found, as shown in the chart below.
J.P. MORGAN
The iShares MSCI Brazil ETF has surged almost 17% this month through Monday, with most of the gain coming from a 12.5% jump on Oct. 5 following the first-round election results, according to FactSet data. That brought the fund's gain this year to a massive 37% in dollar terms, far outpacing what the S&P 500 has delivered so far.
The ETF's biggest sector exposure is to financials, with a weighting of 38.3% as recently as Friday, according to fund data on BlackRock's website. Energy was the next-largest sector in the fund, with a 16.7% weight, followed by utilities at 13.3%, materials at about 11.1% and industrials at 8.6%, to round out the top five.
As for individual stocks, its biggest holdings on Friday included shares of banking firms Nu Holdings (NU) and Itau Unibanco Holding (BR:ITUB4), materials company Vale (BR:VALE3) and energy business Petroleo Brasileiro (BR:PETR4) (BR:PETR3).
While investors worry about AI concentration risks in the U.S. - where the S&P 500 has outsize exposure to Big Tech and counts information technology XX:SP500.45 as its largest sector - emerging markets can also leave traders heavily exposed to artificial intelligence. For example, South Korea's stock market KR:180721 is dominated by companies tied to the AI trade like SK Hynix (KR:000660) and Samsung Electronics (KR:005930), creating concentration worries.
Even if the AI trade doesn't pan out, Brazil's stock market could still benefit from its significant exposure to energy should the country's economy expand under potentially new fiscal policies. It may also benefit as a fuel exporter amid the ongoing Middle East conflict, which has disrupted global energy supplies, said Jayaraman.
Brazil's next round of voting for the presidential election will take place on Oct. 25, according to a government website.
Brazilian equities likely have more room to run, even if a lot of the optimism over the election has already been priced into the market, said Jayaraman.
Meanwhile, investors seem keen for exposure to Brazilian stocks. The iShares MSCI Brazil ETF has attracted $2.3 billion from investors in the week through Friday, bringing its 2026 inflows to $3.5 billion, FactSet data show. Shares of the fund closed flat on Monday.
As for the U.S. stock market, the S&P 500 saw a slight decline Monday, as it was dragged down by a slump in its tech sector.
Tomi Kilgore contributed.
-Christine Idzelis