Luiz Inácio Lula da Silva has been elected as Brazil's next president, resurrecting leftist politics in the country. He returns after nearly two years in prison following controversial corruption allegations that were later overturned by the Supreme Court, clearing the way for him to run for reelection. He previously ruled Brazil for two terms in a row, from 2003 to 2010. This is his third term, and he received over 60 million votes, the most in Brazilian history. Lula has also received the backing of several well-known economists and politicians, who anticipate better change seen in Lula's previous governments. He is set to take Brazil’s highest office on January 1, 2023.
Many people will be looking for changes in environmental policy, tax reform, housing, education, and poverty reduction. Poverty fell by about 40% during Lula's presidency, and primary school enrollment increased dramatically. However, several key economic reforms in Brazil have been halted under President Bolsonaro. According to CNN, between 2019 and 2021, approximately 9.6 million people fell below the poverty line. People expect Lula's government to revoke the 2017 Labor Reform Act, which granted workers the right to negotiate their rights and benefits with employers. Furthermore, he intends to simplify the tax system and persuade Congress to pass a tax reform that would exempt low-income earners from paying income tax. In addition to this, the environmental policy could be implemented at a large enough scale to put Brazil in a better position for the energy transition, attracting significant green investment. More intriguingly, Brazil will draw global attention to policies aimed at reducing deforestation and limiting the destruction of the Amazon rainforest, an area in which Lula’s government has a strong track record.
In a recent speech, Lula said:
“Instead of being world leaders in deforestation, we want to be world champions in facing up to the climate crisis and in socio-environmental development. That way we will have healthy food on our plates, clean air to breathe and water to drink and lots of quality jobs with green investment.”
According to Bloomberg, Lula's election in 2002 provided one of the greatest-ever investment opportunities in the history of Brazil's equity markets, and history has begun to repeat itself, with the MSCI Brazil ETF soaring after Lula won the election last week.
The iShares MSCI Brazil ETF (NYSE:EWZ) price fell after Lula Takes the Office in 2002
The Brazilian real, on the other hand, has been able to gain momentum against the US dollar this year. Brazilian equity markets (BVSP) have outperformed other emerging markets this year as well. With attractive valuations, a low vulnerability to global instability such as Russia's invasion of Ukraine, and the easing of political uncertainties, the Brazilian Real remains appealing to investors as it continues its upward trend.
4 Stocks to Consider as Brazil enters a transitory phase
1. G-City
G City (OTC:GZTGF), formerly known as Gazit Globe, is a leading global real estate company specializing in the ownership, development, and management of retail and mixed-use properties in North America, Brazil, Israel, the United States, Europe, and internationally. Gazit has significant holdings in Brazil that are expected to benefit from the political transition. Because Brazil is regarded as one of the best places to invest in real estate, and with an increase in housing construction, G-City will likely benefit as prices rise in Brazil. The company’s stock has recently dropped due to widespread concern about it being leveraged at a time of rising inflation and interest rates. However, the company has a large amount of cash on hand to help them get by. G-City's liquidity balances reached, as of the end of September, NIS 2.5 billion, of which NIS 1.3 billion is in cash and cash equivalents, marketable securities and deposits. The proceeds from the sale of the assets, which according to G City should reach NIS 1.5 billion, should be added to these amounts. Furthermore, it seems a large amount of of their leverage is not tied to rising interest rates. At the same time, increasing rent rates in many of their active locations at a rate that is comparable to or higher than the rise in interest rates provide a much-needed financial cushion for the company. From a technical perspective, G-City stock has historically bounced off sharply from the current price levels as well.
2. MercadoLibra
MercadoLibre (NASDAQ:MELI) is a Latin American online commerce platform with operations in 18 countries including Argentina, Brazil, Mexico, Colombia, Chile, Venezuela, and Peru. The company operates an online merchandise platform, fintech solution platform, funding, logistic solutions, classified listing service, advertising platform, as well as an online storefronts solution. The Amazon (NASDAQ:AMZN) of Latin America recently had an outstanding quarter yet remains undervalued. In addition to its diversified and strong portfolio of technology services and scalable business model, the company is likely to benefit from improved consumer spending under Lula’s government. He indicated that he would keep the Auxilio Brasil program, which provides low-income families with cash handouts of 600 reais per month. Furthermore, he promised to increase the amount by 150 reais per child under the age of six, allowing them to continue their education, as well as raise the minimum wage to 1,320 reais. MercadoLibre caters to low-income customers which means the stimulus program would increase demand benefiting the company.
3. Vale
Vale (NYSE:VALE) is the world's second-largest iron ore producer, producing and selling iron ore and iron ore pellets for use as raw materials in steelmaking. The company operates through two segments: Ferrous Minerals, which produces and extracts iron ore and pellets, manganese, ferroalloys, and other ferrous products; and Base Metals, which produces and extracts nickel, gold, silver, cobalt, precious metals, copper, and others.
Despite price pressure and declining sales, investors are showing interest in Vale, an iron ore producer that derives the majority of its revenue from overseas markets. Brazil is an energy-rich country, and the energy sector could benefit immensely under Lula’s administration as the President is likely to focus on leveraging Brazil’s existing competitive advantages in this sector in the coming years in a bid to emerge as a global energy and commodities hub.
4. WEG
WEG (OTC:WEGZY) is a Brazilian company that manufactures and sells electric engineering, power, and automation technology. Globally, the company provides electric motors, generators, transformers, hydraulic and steam turbines, power sockets and switches, SUV vehicle locomotives, and sea transportation capital goods, among other things. The company also offers solutions for renewable and distributed energy generation via hydro, thermal biomass, wind, and solar energy power plants. Lula's administration is more committed to the ESG and decarbonization agendas and has signaled a shift to green energy. As a result, companies involved in renewable energy would benefit from increased inflows making them an interesting investing opportunity.
Conclusion
Brazil, one of the largest countries in the world by the size of land, is at an inflection point amid a noteworthy transition of power in favor of President Lula. Prudent investors have an opportunity to capitalize on this dynamically changing macro environment in Brazil by strategically investing in undervalued Brazilian companies that are likely to benefit from expected political and economic reforms.