Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Brazil ETFs Are Betting on Agribusiness and Fiscal Reform
Transcript
- Lucas: Brazil's EWZ ETF is up a bit over one percent in the past five days. That's not exactly a breakout, but it's notable when you look at what else is happening in emerging markets right now — China's FXI is down nearly two percent, Korea's EWY is up almost fifteen percent on the memory chip boom, and the dollar index just hit 119.3. Luna: So Brazil is kind of treading water while other stories dominate. But why isn't it falling? The headlines out of Brasília don't look great. Lucas: Right — the political noise is constant. President Lula keeps making comments that spook investors, the fiscal deficit is still wide, and inflation is running at around four point five percent. But the market seems to be pricing in something else. Luna: Which is that Brazil's agribusiness exports are on fire. Soybeans, corn, beef — global food demand isn't letting up, and Brazil is the low-cost producer. Lucas: Exactly. The trade surplus hit record levels last year, and it's still running strong in 2026. That gives the currency some support even as the dollar strengthens. The real has actually been one of the better-performing EM currencies this year, which is pretty unusual. Luna: And that feeds directly into the current account. The last data point we have — from October 2025 — shows the current account deficit narrowing to about 191 billion dollars, which is better than the 239 billion it was a year before. Lucas: So the trade surplus is helping offset the deficit in services and income payments. That structural improvement is one reason why foreign investors haven't fled Brazil the way they fled some other EM markets during this strong-dollar cycle. Luna: But let's talk about the elephant in the room — fiscal reform. The government has been trying to pass a package of spending cuts and tax changes for months, and it keeps getting watered down. Lucas: Yeah, the original proposal was more ambitious. The current version that's moving through Congress includes a cap on some mandatory spending and a revamp of the value-added tax, but it's less than what investors wanted. Still, the fact that it's moving at all is being seen as a positive signal. Luna: And the central bank has held the policy rate at 14.25 percent for two consecutive meetings now. That's a strong signal that they're serious about inflation, even if it means slowing the economy. Lucas: It's a credibility play. The real test will be whether the fiscal package actually gets enacted and whether it's enough to bring the debt to gdp ratio down over the medium term. If it does, Brazil could be in a position to cut rates later this year or early next year. Luna: And that could make Brazilian bonds really attractive again. At 14.25 percent, the carry trade is already tempting, but if rates start coming down, capital inflows could accelerate. Lucas: Speaking of which — if walking through the economy with us has made something click, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Luna: Yeah, it's a low-key way to keep the show independent and ad-free. We appreciate it. Lucas: So back to Brazil — one thing I'm watching is how the China slowdown affects commodity demand. China is still Brazil's biggest trading partner, and with the yuan weakening to 6.81 per dollar, Chinese buyers have less purchasing power. Luna: That's a real risk. But Brazil has been diversifying its export destinations — the Middle East and Southeast Asia are growing fast. And agribusiness demand is relatively inelastic. People need to eat. Lucas: Right. And there's another factor — the energy transition. Brazil has massive potential for biofuels, critical minerals, and even green hydrogen. Petrobras is investing heavily in renewable fuels alongside its oil production. Luna: But oil prices are volatile, and Petrobras is also under political pressure to keep domestic fuel prices low. That's a conflict that doesn't go away. Lucas: It's a perennial issue. But what's interesting is that the market seems to be looking past the political noise and focusing on the earnings momentum. The EWZ's one percent gain in a week when most EM funds are flat or down suggests there's some real buying interest. Luna: Compared to other commodity-driven EMs, how does Brazil stack up right now? We've talked about Peru and Mexico in previous episodes. Lucas: Mexico's EWW is up a bit too, but the peso strength has been a headwind for their manufacturing exports. Peru — well, we said Peru could be the next big EM story, but it's still early. Brazil has more liquidity, deeper capital markets, and a more diversified economy. It's not a pure commodity play anymore. Luna: And it's also a democracy with functioning institutions — the central bank independence, the judiciary, the electoral system. That matters a lot for long-term investors. Lucas: Absolutely. So if you're looking for a way to play emerging markets that isn't China or Korea, Brazil offers a mix of high carry, commodity exposure, and a reform catalyst. It's not a risk-free trade — nothing in EM is — but the risk-reward is interesting. Luna: The key risk in the near term is the fiscal package getting derailed. If the government can't pass meaningful reform, the central bank will have to keep rates high, and the growth outlook will deteriorate. Lucas: And the global backdrop is still uncertain — the dollar could strengthen further if the Fed stays hawkish, which would pressure all EM assets. But Brazil's trade surplus gives it a buffer that many other countries don't have. Luna: Summing up: Brazil is a 'show me' story. If the government delivers on fiscal reform, the market could re-rate significantly. If not, you're left with a high-yielding but volatile commodity play. Lucas: That's the trade. And we'll be watching the next few months closely. Thanks for listening. Luna: Until next time.