Black Monday in Brazil

The election in Brazil didn’t go the way we hoped.

Lula, an 80-year old socialist, won the presidential runoff. This will be his fourth term as the country’s leader.

Prediction markets had given the right-wing candidate, Flavio Bolsonaro, an 81% chance last week.

Back on October 5th, when it looked like Bolsonaro would win, our favorite Brazilian ETF (EWZ) shot up 13% in a day.

But now, with a socialist in power for the next four years, we have to decide whether Brazil is still worthy of investment.

Stocks + Currency Crash

Brazilian stocks fell across the board today. The largest Brazil ETF (EWZ) is down a whopping 21% as of 1:00 pm ET.

Our beloved Petrobras (PBR, PBR.A), which has done so well for us this year, fell 15% on the day.

The Brazilian currency, the real, fell about 12%. That’s a big part of the reason why Brazilian stocks got hit so hard today. When you own stocks in a foreign country, and that country’s currency fluctuates, it magnifies the move (up and down).

However, I’m not giving up on Brazil. EWZ is still +43% (with dividends reinvested) from our original February 2025 writeup.

Petrobras is still +102% (with dividends reinvested) from our first May 12th writeup.

In South America, politics clearly play a big role in stock market returns. But this selloff looks overdone.

Socialist Fears vs. Capitalist Hopes

Investors had hoped that a conservative president would rein in Brazil’s deficit spending, de-regulate, and make the country a magnet for foreign capital.

Well, there goes that plan. But all is not lost. I plan to continue to hold EWZ and other Brazilian investments, reinvest my dividends, and sit tight.

I have no plans to sell Petrobras. It remains one of the largest positions in my portfolio. If that changes, I’ll let you know.

Here’s why I’m not too worried about Lula. He’s been running the country for the past 4 years and it hasn’t imploded. Yes, Bolsonaro would have been better for investors.

But Lula should be fine. When he returned to the presidency in January of 2023, he did make significant changes at Petrobras (PBR).

His government steered Petrobras to spending more on new oil production, and less on dividends. Previously, Petrobras paid out about 60% of free cash flow to investors as a dividend. Under Lula, they paid out about 45%.

The changes weren’t all bad though. Partially as a result of all the new investment, the company’s oil production has soared. Since Lula’s return to office in 2023, Petrobras oil production has jumped 27%, the best among all major producers. The company has invested heavily in Brazil’s rich pre-salt offshore oil fields, and it’s paying off.

So even though Brazil’s socialist president tinkered with Petrobras, the company is pumping more oil than ever, and still remains a cash flow machine. Their average all-in cost to produce a barrel of oil is around $35.

The real risk investors fear is a darker sort of government intervention. If oil stays high, Brazil could force the company to sell fuel at a loss domestically.

The Brazilian government ran this playbook from 2011-2014. It crushed confidence in Petrobras and Brazilian stocks, because investors feared it could happen again.

However, I think Brazil learned its lesson from that episode. They fooled around with the country’s most popular company, and the stock market didn’t recover for more than a decade. I don’t think they’ll make that mistake again.

Even after today’s sell-off, Brazil’s stock market is one of the world’s best performing over the past 2 years. I don’t think Lula is dumb enough to ruin the country’s resurgent economy.

But we do have to acknowledge it as a risk. And hey, there’s political risk everywhere today. Even here in the U.S.

Common Themes

French economist Frederic Bastiat famously wrote, “The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else.”

Bastiat wrote those words in 1848, but they remain highly relevant. This is essentially what happened in Brazil. Lula promised voters more benefits, and he won.

As we approach midterm elections, America faces its own challenges. An increasingly-socialist Democratic party threatens to sweep Congress.

If Dems do sweep, I don’t think the S&P 500 will crash 21% in a day like we saw in Brazil. But we should see a steep sell-off.

And it would be the beginning of more socialist America. Higher taxes, wealth redistribution, more censorship, more regulation, endless immigration, Green New Scam 3.0. They could even expand the Supreme Court and fill it with neoliberals. I outlined the risks in President AOC’s First Term.

The U.S. is no longer immune from the political chaos that was once only found in emerging markets. We could have a mini-Brazil situation ourselves soon.

So yes, I’m holding onto my Brazilian stocks. This is a long-term thing for me. When you buy quality companies at 9x earnings and fat yields, good things tend to happen in the long run.

I’m sticking to the original plan. Hold and reinvest dividends for ~5 more years, wait for the big re-rating, and sell when valuations get high.

Of course, if anything changes, you’ll be the first to know.