A 20% Drop in One Morning? I See a Bargain in Brazil.
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| By Sean Brodrick |
Ay, Caramba! Brazilian stocks are getting absolutely hammered today.
The iShares MSCI Brazil ETF (EWZ) plunged more than 22% this morning.
Brazil’s benchmark Bovespa fell so hard that trading was temporarily halted.
The Brazilian real plunged against the dollar.
And some individual Brazilian stocks fell even harder.
Why?
President Luiz Inácio Lula da Silva pulled off a surprise re-election victory Sunday over his conservative opponent, Flávio Bolsonaro.
Investors Spent Weeks Betting on a Bolsonaro Victory.
Brazilian stocks hit record highs after the first round of voting.
Traders anticipated a more business-friendly government promising spending cuts, deregulation, privatization and tighter control over Brazil’s debt.
Instead, they got Lula.
Now, traders are throwing a tantrum.
It’s Easy to See Why Traders Preferred Bolsonaro.
Lula is more comfortable with government intervention in the economy.
Brazil’s government debt has climbed above 80% of GDP.
Investors worry Lula will keep spending, while Bolsonaro was expected to pursue a more aggressive fiscal cleanup.
Those risks deserve a discount.
But a 20%+ haircut in a single morning?
I think that’s an opportunity. After all …
Brazil Is Still Growing
The election changed Brazil’s president for the next four years. It did not suddenly destroy Brazil’s economy.
The International Monetary Fund expects Brazilian real GDP to grow 2.2% this year.
In July, the IMF said its “economy has remained remarkably resilient in the face of multiple shocks.”
What’s more, the country is one of the world’s great commodity powerhouses.
It is a major producer and exporter of oil, iron ore, soybeans, coffee, sugar and other commodities.
Higher global commodity prices funnel money directly into the Brazilian economy.
Brazil is also benefiting from rapidly expanding oil production.
The IMF specifically cites accelerating hydrocarbon production, tax reform and normalization of monetary policy as forces supporting growth.
Then there’s the currency.
Brazil’s currency, the real, was down roughly 10% against the greenback this morning.
That hurts U.S. investors in the short run. But it also makes Brazilian exports more competitive. And it boosts the value of dollar-denominated revenues when translated back into reais.
Indeed, while most Brazilian stocks were being massacred today, exporters such as Vale (VALE) and Suzano (SUZ) initially held up much better — and at points actually rose in local trading.
Finally, the sell-off itself has made Brazilian stocks dramatically cheaper.
Before today’s crash, EWZ traded for only about 12x earnings.
Knock another 20%+ off Brazilian share prices without a corresponding collapse in earnings, and you suddenly have one of the world’s major emerging markets trading at fire-sale prices.
The Easy Way to Buy Brazil
If you want to buy the country rather than bet on one company, the easiest way is the iShares MSCI Brazil ETF (EWZ).
EWZ gives you a basket of roughly 50 Brazilian stocks in one trade. It is heavily exposed to the industries that dominate Brazil’s economy — financials, energy, materials, utilities and industrials.
Its largest positions going into the election included:
- Nu Holdings (NU) at roughly 8.4%,
- Itaú Unibanco (ITUB) at 8.3%,
- Petrobras (PBR and PBRA) at a combined 15.5% through its two share classes,
- Vale at about 7.5% and
- Brazilian exchange operator B3 (BOLSY) at 4.3%.
That gives you banks, oil, iron ore, fintech and other major pieces of the Brazilian economy in a single package. EWZ’s expense ratio is 0.59%.
And now you can buy it at a price we haven’t seen in months.
Just look at this chart …
The EWZ just plunged to its lowest level since June. Yeah, that looks like a buying opportunity to me, if I were in the mood to buy an ETF.
But I’m Banking on NU
Personally, I’m taking a more targeted approach.
I’m buying Nu Holdings for my personal portfolio.
Supercycle Investor subscribers already own NU. Today, the stock is taking an enormous haircut simply because it is Brazilian.
That’s nonsense. Nu is the largest digital bank in Latin America, and its growth numbers are extraordinary.
In the second quarter, it reached 139 million customers across Brazil, Mexico and Colombia. That’s up from 122.7 million a year earlier.
- Revenue surged 39% year over year to nearly $5.9 billion.
- Net income jumped 49% to a record $1.1 billion.
- Return on equity hit an eye-popping 33%.
And Nu isn’t simply adding customers. It is squeezing more money out of each relationship.
Average monthly revenue per active customer climbed 22% year over year to $17.10.
Meanwhile, the company’s extraordinarily lean digital infrastructure kept its average monthly cost to serve an active customer around $1.
At the same time, its credit portfolio expanded 37% to $39.4 billion.
Nu has expanded into other parts of Latin America. And last month, it started operations in the U.S.
Wall Street expects that growth to continue. Consensus estimates compiled before the election called for roughly 40% earnings growth in 2026, with another strong increase expected next year.
None of that adds up to a 20% haircut overnight, which is what we got.
The market panicked, plain and simple.
When I see a great business getting thrown out with the proverbial bathwater because traders were caught leaning the wrong way on an election …
I don’t want to run with the crowd. I want to buy the sale.
I could make the same case for Petrobras (PBR) or Ambev SA (ABEV). And I could certainly make a bullish case for EWZ.
You should do what makes sense for you when it comes to your own risk tolerance and investment goals. I recommend you start by checking out Nu Holdings’ page on the Weiss Ratings website.
As for me, now that trader panic put Brazil on sale, I’m buying with both hands.
All the best,
Sean
