Brazil’s realignment: From economic stagnation to strategic relevance

Inflation during this period was predominantly driven by cost-push factors such as regulated price increases, wage indexation, and food price volatility. To contain inflation, Brazil’s central bank sharply increased the benchmark SELIC rate from 10% to 14.25% by 2015. While successful in moderating inflation expectations, this tightening significantly constrained domestic credit and further deepened the economic slowdown.

Political developments exacerbated these challenges. The extensive corruption revelations from Operação Lava Jato increased Brazil’s political risk premium. A subsequent leadership change in 2016 led to market stabilisation and initial structural reforms, yet the economic recovery remained modest and vulnerable.

Part of Brazil’s economic structure historically relied on commodity exports, primarily oil, iron ore, and soybeans. This reliance exposed the economy to volatility and risks associated with global commodity price fluctuations, currency appreciation, and sectoral imbalance.

In 2024, these commodities represented 5.1% of GDP and 14.3% of exports. However, diversification across multiple commodities helps moderate shocks, with, for example, weaker oil prices being offset by stronger soybean exports to China. Nonetheless, these sectors remain tied to global demand, and a broad slowdown can weigh on commodity demand. Services, industrial activity, and domestic consumption provide additional stability, helping sustain domestic demand and employment even during periods of external weakness.

Since 2023, Brazil has implemented substantial policy reforms aimed at fiscal consolidation, tax efficiency, and economic stability. The introduction of a new fiscal framework limiting spending growth to 70% of revenue increases and a simplified VAT system improved Brazil’s fiscal credibility. Exhibit 4 shows the recent improvement in credit and risk rating. 

Monetary policy complemented these reforms with consistent anti-inflationary measures. Brazil’s central bank maintained elevated interest rates, significantly higher than regional peers, contributing to a marked reduction in inflation, from a peak of 12% in early 2022 to approximately 5% by June 2025. Nonetheless, Brazil faces ongoing fiscal challenges, including elevated public debt (76.5% of GDP) and rising domestic credit levels, necessitating continued policy monitoring.

Brazil’s GDP growth accelerated from 2.6% in 2023 to 3.2% in 2024, outpacing most major economies in the chart and demonstrating consistent momentum despite a challenging global backdrop. Key domestic indicators such as retail sales growth (+8%), declining unemployment rates (from 11% in 2022 to 6% in 2025), and stable industrial production (+2.8%) underpin this economic resilience, reflecting strong internal consumption dynamics.

The FTSE Brazil Index provides insight into Brazil’s economic transition. After initially outperforming global indices due to a commodity rally, the index subsequently declined by 13% from its 2023 peak due to tightening global financial conditions and falling commodity prices. However, recent performance indicators, such as a notable 27% return in in 2025 through June, which was 17% higher than the FTSE All-World and 16% higher than the Emerging index, highlight improving domestic economic fundamentals and market confidence. 

Industry performance within the index reveals Brazil’s economic realignment. Domestically focused industries such as Financials (8.1%), Utilities (3.1%), and Industrials (2%) positively contributed to performance, while cyclical sectors tied to global conditions, such as Energy (-1.3%) and Basic Materials (-2.2%), detracted from returns. This performance aligns with Brazil’s pivot to industries driven by domestic economic activity rather relying overly on global cyclical factors. Lower industry performance in Oil and Basic Materials is in line with global trends.

Brazilian equities appear to be undervalued relative to global peers. As of 2025, Brazil’s forward P/E ratio stands at 7.9, significantly below both the All-World average of 18.5 and the Emerging Market average of 13.2. Despite macroeconomic progress and improved earnings performance, this valuation gap has persisted over time. Since 2022, Brazil’s forward P/E has risen from 6.1 to 7.9, yet the discount to broader benchmarks remains wide, pointing to a potential re-rating if current momentum holds. 

The paper’s analysis of revenue composition reveals Brazil’s increasing domestic orientation, with approximately 72.5% of FTSE Brazil Index revenue derived from domestic operations. Over the past year revenue exposure to China decreased significantly (-21.5%), while revenue from the United States increased (+17.4%), underscoring effective diversification efforts amid changing global trade dynamics. Initially, Brazil’s balanced trade surplus with China and modest US deficit suggested limited tariff risk. However, the US has since signalled a potential 50% tariffs on Brazilian goods independent of the US’s surplus with Brazil. While this raises near-term uncertainty, recent US negotiations with other countries suggest that outcomes are not set in stone. 

Finally, from a portfolio perspective, Brazil’s equities offer some diversification due to moderate correlation with major global equity markets. Brazil’s equity market demonstrates a lower correlation with US equities (0.58) and Emerging Markets (0.75), attributed to its sector composition emphasizing cyclical, domestic, and commodity-oriented industries. This diversification supports stronger return potential and enhances the balance of global equity allocations.

Source: FTSE Russell and LSEG, as of June 30, 2025. Past performance is no guarantee of future returns. Please see the end for important legal disclosures. 

Brazil’s economic realignment marks a shift from prolonged stagnation toward greater macroeconomic stability and structural improvement. Recent reforms and disciplined monetary policy have strengthened the outlook, but persistent inflation pressures, high public debt, and external uncertainties require sustained policy discipline.

A diversified commodity base, resilient domestic demand, and credible fiscal and monetary frameworks enhance Brazil’s capacity to navigate global shocks, though exposure to global growth cycles remains significant. Within a more fragmented but interconnected global economy, Brazil offers an instructive example of resilience and structural adjustment, while facing ongoing challenges that will test the durability of these gains.