Bom Dia, Philo! 🇧🇷
The case for a post-Lula Brazil. What's the trade?
Brazil could be setting up for something great while Western equities are topping. Lula is getting old and frail; his administration is getting tired and so are the people.
The polls show him leading the 2026 election but I wouldn’t take those polls too seriously. The actual election is a year away and the polls include Bolsonaro as a choice when he legally cannot run for office until 2030.
A lot can happen till the 2026 elections, and besides, this isn’t a bet on Lula losing but rather an asymmetric trade on the chance of a broader Brazilian revival which *could* include a change in the political landscape.
That being said, I present to you the MBGA trade: MAKE BRAZIL GREAT AGAIN.
MAGA has Trump wearing the hat…
But Brazil could get Gisele Bündchen or even Alana Felisberto, the new blood of Brazilian modelling to wear it.
Personally, I know what I prefer.
The Military Dictatorship & Historical-Political Context
Some years ago a Brazilian song caught my ear. The song and melody felt very emotional, but something told me it wasn’t a love-themed song.
Turns out it was a Brazilian anti-dictatorship song with a lot of history that was recently remade. Definitely give it a listen 🎶🎶
Rousseff and Lula, respectively the previous and current leader of Brazil were both directly involved in the anti-dictatorship resistance of the time.
They are both are left-leaning politicians and belong to the Worker’s Party (Partido dos Trabalhadores, PT). Modern Brazilian politics has been largely shaped by leftist leadership.
Things however took a short detour when rising discontent with Rousseff’s presidency led to her 2016 impeachment — paving the way for Jair Bolsonaro’s rise and subsequent election in 2018.
Bolsonaro ended up getting convicted for a 27 year jail sentence after plotting a coup to stay in power, when he lost the 2023 election to Lula.
Lula recently got himself into some trouble with the families of those who perished during the coup, when he called of events commemorating the 1964 coup.
This was posturing from Lula to appease the military, as senior military officers are facing jail time for allegedly conspiring to stop him from taking power after the 2022 election.
Brazilian political dynamics are intense; with foreign actors like the West, the military and the Brazilian left and right all playing their part in the overall mix. As a result, the Brazilian leader must play Art of War tactics and strategise to keep a balance. Lula definitely knows how to do this well.
Note: Brazil is the anchor of Latin America. It has the biggest economy, carries cultural sway and is politically influential. Election results in Brazil carry a heavy importance for the broader region.
And with Trump 2.0 being so invested in Milei and Argentina while opening a battle front against Maduro’s Venezuela — Brazil is extremely important to the White House.
Remember that Brazil brings the B in BRICS — the greatest adversary of the US in the Supremacy Wars. While Lula knows and understands this, he can’t risk a clash with the US leading up to election day. He has to walk a tightrope.
Make Brazil Great Again!
Brazil has been the investment interest of many a value investor.
Banks, Resources, Energy companies — great returns have been achieved investing in some of these names.
Yet Brazilian equities have been underperforming because the State leeches too much off them and the economy.
Under Lula 1.0 and Rousseff, corporate Brazil had to operate with:
sky-high inflation
state-owned strategic champions crowding out private private enterprise
a socialism-run economy
a collapsing Real to help exporters.. as if that works
A confluence of these factors weighed on the Bovespa which is down 35% in USD terms, since its late 2011 peak.
Now let’s review the current macro and political setup before moving on to:
who we think will win next year
why we think so
what the market implications will be
and structuring the trade