Brazilian stocks have retreated from their April peak, with the Ibovespa index down 11% since then, though it remains 10% higher this year. Foreign investors pulled 14.9 billion reais (£2.2 billion) from local shares in May alone, the fastest pace in six years, according to Bloomberg.
The slump is attributed to two factors: the AI trade distracting investors from commodity plays, and expectations of higher inflation and interest rates weighing on emerging-market equities. Brazil's benchmark Selic rate stands at 14.25%.
Despite the recent fall, the FTSE Brazil index returned 47.2% last year and remains attractively valued on a 12-month forward price/earnings ratio of 9.5, compared with 12.6 for the wider FTSE Emerging index. Financials make up 40% of the MSCI Brazil index, with energy and materials combined at nearly 30%.
Attention now turns to general elections scheduled for 4 October. Incumbent President Luiz Inácio Lula da Silva holds a narrow polling lead over Flávio Bolsonaro. Lula can point to record-low unemployment and annual growth of around 3%, but Brazilian debt is described as unsustainable, with gross public debt forecast to hit 99% of GDP by 2030 and a nominal deficit of 8.1%.