“Brazil trade” back in game amid global tensions

As of April 29, the benchmark Ibovespa stock index had risen 3.7% for the month and 12.3% year-to-date. Small-cap stocks were up 8.3% in April and 18% since January. Real estate stocks soared 10% in the month and 29.3% on the year, while consumer-linked stocks jumped 12.4% and 21.5%, respectively—leading gains in the equity market. Meanwhile, the S&P 500 was down 0.9% in April and had lost 5.5% since the beginning of the year.

In fixed income, the IRF-M index, which tracks a basket of fixed-rate government bonds and is calculated by the Brazilian Financial and Capital Markets Association (ANBIMA), delivered the strongest performance, with gains of 2.7% in April and 7.5% for the year. The IMA-B 5 index, which tracks bonds maturing within five years and linked to the IPCA consumer price index, was up 1.7% and 4.9% over the same periods. The real strengthened, with the exchange rate per U.S. dollar falling 1.3% in April and 8.9% year-to-date. Gold, a traditional hedge during crises or inflationary periods, rose 4.6% in April and 15.9% for the year

Is ‘Brazil trade’ back?

“No one expected the month to end the way it did,” said Sigrid Guimarães, founding partner at Alocc Gestão de Patrimônio. “On ‘Liberation Day’—when Trump laid out his tariff plan—the U.S. market turned extremely volatile, flirting with circuit breakers and chaos. Yet it ended with the S&P 500 down 1%, while the Brazilian stock exchange rose, the dollar fell, and interest rates dropped. What we saw is that Brazil is well-positioned for this scenario.”

Since Alocc’s clients hold significant equity exposure via a fund of actively managed portfolios, the asset manager had a close view of the gains. “Some asset managers posted real returns of 10% to 13%. That’s what April was about.”

With the rise in companies listed on the Ibovespa, the price-to-earnings (P/E) ratio—used to gauge return expectations—is now at 9 times earnings, up from 7 before the rally. “These are solid real assets, but people still don’t believe in Brazilian stocks. When we analyze the companies, we think, ‘this can’t be real.’ If valuations return to the average, there’s room for further gains, and those well positioned will benefit.”

Previously, the rebound was limited to the index, but now more sectors are performing well and managers are nearly fully invested, Guimarães said. “Prices are extremely attractive. If investors know how to identify the good ones, they can benefit greatly when the market improves.”

Fabio Zaclis, head of macro multi-strategy at Daycoval Asset Management, said part of the Brazilian stock market’s rally stems from a reallocation of global resources, given that local valuations remain heavily discounted compared to peers. “Brazil always draws attention from foreign investors because of valuation, but this is not yet a standalone Brazil story. It’s not tied to the interest rate cycle, and there’s no retail investor inflow either,” he said. “It’s more of a global story than a local one.”

In an environment of high interest rates and no fiscal reform, fundamentals haven’t improved, Mr. Zaclis noted. Capital that had been sitting idle in the U.S. is now flowing toward other major currencies like the euro, Swiss franc, yen, and key emerging markets—including Brazil.

After a stressful start to the year for Brazilian assets, with future interest rates spiking and the exchange rate per dollar breaking past R$6, Mr.Zaclis believes the current rally is more a result of global dynamics than domestic developments.

Shift in perception

What has changed since the end of last year is the perception of Brazil’s Central Bank following Gabriel Galípolo’s appointment to succeed Roberto Campos Neto as its head. “We saw a Selic [policy] rate hike coupled with clear communication about inflation expectations and the need to raise rates to hit the inflation target,” Mr. Zaclis said. “That explains part of the [price] relief and a risk-on move.” The key question now, he said, is whether this momentum is sustainable.

Mr. Zaclis also pointed out that real interest rates offered particularly high premiums, especially in strategies involving breakeven inflation—comparing fixed-rate bonds with those tied to the IPCA. “We saw local interest rate curves offering historically high premiums, rarely seen when compared to the Central Bank’s targets or the Focus survey,” he said, referring to the Central Bank’s market expectations report.

With upcoming fiscal and quasi-fiscal stimulus on the radar—via state-owned bank credit or new formats like private payroll-deductible loans—he expects the Central Bank to keep raising rates until inflation aligns with the target. Any reversal would require changes in current inflation levels. Projections for 12 months ahead still show the IPCA hovering between 5.5% and 5.7%, far from the 3% target.

Mr. Trump’s tariff policy may have an external effect, shaking global markets and helping to anchor expectations in a world facing weaker growth, Mr. Zaclis added. Commodity prices could support this adjustment.

Carlos André, president of ANBIMA, said it remains unclear how Mr. Trump’s measures are affecting global markets and domestic asset prices. “The key point is rising uncertainty. That leads to volatility. Without a clear outlook, it becomes very hard to make investment decisions or price assets reliably. The word of the moment is uncertainty.” In such times, investors turn to traditional fixed income, but he sees this as a “circumstantial” move.

Bruno Funchal, CEO of Bradesco Asset Management, voiced cautious optimism regarding monetary policy. “The difficulties created by the tariff war and its impact on global growth could accelerate our own interest rate cut cycle.”

For those who diversified abroad, April brought above-average volatility—but that doesn’t mean allocating more of a portfolio overseas is a bad idea, said Caio Fasanella, head of investments at Nomad, a financial services platform.

Global diversification

“With the sharp depreciation of the real in recent years, Brazilians have lost global purchasing power and wealth, and this long-term trend will persist because of fiscal challenges and structurally higher inflation compared to the U.S.,” Mr. Fasanella said. “Those who built globalized portfolios in the past are now reaping the rewards of diversification.”

He acknowledged, however, that investors who entered foreign markets more recently have felt the brunt of volatility since early April, when President Trump unveiled his import tariff plan. “It’s a natural correction in a longer-term bull cycle,” Mr. Fasanella said.

Three weeks after the announcement, he said there’s still no clear alternative to U.S. assets or the dollar. “It remains the safe haven—where investors run to, turbulence or not—be it the currency or Treasury bonds.”

Brazil, meanwhile, is in a markedly different place, with inflation rising for longer and currency pressure easing after the exchange rate per U.S. dollar peaked at R$6.2 at the end of 2024. “The real interest rate remains extremely high, at levels we haven’t seen in a decade—since the impeachment of [former president] Dilma Rousseff,” Mr. Fasanella said. “For Brazilian investors, there’s now a clearer path to fixed-income investments with low risk, whether in floating-rate bonds or IPCA-linked securities, given lower inflation.”