The political tide in Brazil is changing again. How to trade it

Brazilian President Lula's approval ratings are declining, driven by fiscal policy concerns, controversial foreign policy stances, and perceived missteps, with recent polls showing disapproval exceeding 50%. Despite economic growth, investors are wary of Lula's leftist policies, as evidenced by the iShares MSCI Brazil ETF (EWZ) underperforming the S&P 500 since his election; however, EWZ has recently surged as Lula's popularity wanes, and Brazilian equities remain relatively inexpensive, suggesting a potential opportunity for investors anticipating a shift towards more market-friendly policies, such as purchasing EWZ calls.

Analysis

Recent polling data indicates a significant weakening of Brazilian President Lula da Silva's political standing, with disapproval rates reaching 53.7% in a May 2025 AtlasIntel survey and 57% in a June 2025 Quaest poll, the highest of his current term. This decline is attributed to several factors, including a budgetary credibility crisis by mid-2024 stemming from fiscal policies prioritizing revenue increases without substantial spending cuts, which contributed to the Brazilian real hitting record lows against the dollar. The administration's failure to pass key revenue-generating measures, controversial foreign policy stances, and perceived missteps such as blaming the central bank for high interest rates have further eroded support. Historically, Brazilian market performance has been sensitive to political shifts; Lula's 2022 victory saw a dip in assets, and since January 2023, the iShares MSCI Brazil ETF (EWZ) has underperformed the S&P 500 by 46.5%. However, coinciding with Lula's recent popularity decline, EWZ has surged over 25% year-to-date, significantly outperforming the S&P 500. Despite this rally, Brazilian equities appear relatively inexpensive, trading at approximately 8.5 times forward earnings compared to 23.5 times for the S&P 500, suggesting a valuation discount. The ongoing trial of former President Jair Bolsonaro for an alleged coup plot adds another layer to the complex political environment.

Key Decisions for Investors

• Investors should note the inverse correlation between President Lula's approval ratings and the performance of Brazilian equities (EWZ), which, combined with a low forward P/E of 8.5x, may present a continued opportunity if political trends favor more market-friendly policies.
• Close monitoring of Brazil's political developments, including fiscal policy trajectory, public sentiment indicators, and potential leadership changes, is crucial, as these are significant drivers for Brazilian asset valuations.
• Given the speculative nature of the situation and the article's suggestion, investors with a higher risk tolerance might consider strategies like purchasing EWZ call options, such as the August $28 strike calls mentioned, to position for potential further upside in Brazilian equities contingent on a favorable political shift.