Brazil's economic outlook dampens – what it means for investors
While Brazil's markets enjoyed a high last year, they now walk on the "financial wild side" as investors grow wary of president Lula's spending plans

Brazilian stocks rode a “wave of optimism” to a record high last year, says Marcelo Azevedo in Folha de S. Paulo. Markets were relieved that the newly installed left-wing administration of Luiz Inácio Lula da Silva had promised to keep spending under control. This year has been trickier. In January it was apparent that US interest rates would stay higher for longer. That has squeezed emerging markets such as Brazil, which struggle to attract the attention of US-based investors when dollar bonds are already paying well. In April, Brazil’s government compounded the problem by relaxing fiscal targets, further spooking investors.
Are investors losing confidence in Brazil?
The local bovespa stock index has dropped by 5% this year, while the real has been among the worst-performing emerging market currencies this year. A bigger welfare budget has seen state spending rise by 6% above inflation since Lula took office, Rafaela Vitoria of Banco Inter tells the Financial Times. Brasilia has backpedalled on pledges to achieve a primary budget surplus (meaning that government tax revenue exceeds expenditure, excluding interest costs), say Michael Pooler and Beatriz Langella, also in the Financial Times.
At 76% of GDP, Brazilian public debt is already high for an emerging economy. Brazil is in a more precarious position than its peers, Thierry Larose of Vontobel Asset Management tells Craig Mellow in Barron’s. “Debt service already eats up nearly 30% of Brazil’s state revenue, compared with 15% for Mexico.” Instead of tightening the purse strings, Lula’s first instinct has been to blame the central bank for supposedly keeping interest rates too high.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
“Global investors have soured on the Brazil story”, but on an average of just 7.5 times earnings – a roughly 25% discount to the historical average – the market does contain some “deep value plays”. And, as Larose notes, “Lula has a track record of shifting pragmatically before things get out of control”.
The president may have just pulled off one such pivot, says The Economist. Between 1 January and mid-June, the real had plummeted by 17%, but Lula has since thrown his weight behind finance minister Fernando Haddad, who wants to keep spending tight. That has calmed markets, helping to spark a mini-rally in Brazilian assets in recent weeks.
An immediate crisis is not imminent. The “central bank has $360 billion in reserves” and “almost all the public debt is in local currency”. But an economic model built on “high commodity prices” and “subsidies to favoured businesses” will do nothing to cure “stagnant” productivity or improve the “deficient” education system and infrastructure. The population is ageing and pensions already account for “44% of federal spending”. Brazil is “walking on the financial wild side”.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
-
Stock market turmoil: ‘Should I move money out of investments and into cash instead?’
As global stock markets go into turmoil over Trump tariffs, you may be wondering if your money is safe or whether you should sell your shares and move to the so-called safety net of cash accounts
By Kalpana Fitzpatrick Published
-
Why French far-right leader Marine Le Pen has been banned from running for office
Marine Le Pen, presidential candidate and leader of France's right-wing National Rally party, has been barred from standing by the country's judges.
By Emily Hohler Published
-
Five years on: what did Covid cost us?
We’re still counting the costs of the global coronavirus pandemic – and governments’ responses. What did we learn?
By Simon Wilson Published
-
India's stock market decline wipes out $1.3 trillion in market value – can investors stay optimistic?
More than $1 trillion has been wiped off from India's stock market after investors turn to China. Has the emerging-market darling hit rock bottom?
By Alex Rankine Published
-
Protests erupt in Turkey after the arrest of president Erdogan's rival
Turkey's president has jailed his main political opponent, Ekrem Imamoglu
By Emily Hohler Published
-
Can investors stay optimistic about Russian stocks?
Investors look to profit from Russia as Trump pushes for peace in Ukraine. But is it worth the risk?
By Alex Rankine Published
-
Volodymyr Zelenskyy moves to appease Donald Trump – what happens now?
Ukraine’s president Volodymyr Zelenskyy is conceding ground to secure the least-worst deal possible, says Emily Hohler
By Emily Hohler Published
-
Global investors have overlooked these top tips in emerging markets
Opinion Chris Tennant, co-portfolio manager of Fidelity Emerging Markets, picks three attractive companies in emerging markets
By Chris Tennant Published
-
Leading companies cashing in on India’s compelling growth prospects
Opinion Ewan Thompson, manager of the Liontrust India fund, highlights three companies he thinks are well-positioned to generate attractive economic returns
By Ewan Thompson Published
-
Should you invest in emerging markets?
Emerging markets offer strong, long-term growth and excellent value, says Rupert Hargreaves
By Rupert Hargreaves Published