Brazilian stocks have been on a tear, but stubborn inflation could grind the recent rally to a stop. The Bovespa index , Brazil’s stock benchmark, hit a record high in late August, completing a sharp comeback from steep year-to-date losses. At one point, Bovespa was down as much as 11.3% in 2024. The index continues to trade around that all-time high in September, less than 2% removed from it. That turnaround was fueled by strong economic data and the U.S. Federal Reserve signaling the end of its more than two-year tightening cycle. Lower U.S. rates can lower the dollar’s value, making it easier for other countries to pay — or take on new — dollar-denominated debt. Last week, the Brazilian finance minister Fernando Haddad said the government expects economic growth of more than 3% for the year. That’s up from a previous projection of 2.5%. .BVSP YTD mountain Bovespa year to date Further gains will be harder to come by, however, as fiscal stimulus measures implemented in the past year could keep inflation elevated — forcing the country’s central bank to increase rates. “The fact is that fiscal largesse is forcing the central bank to overcompensate for a fiscal policy that is way too loose,” Goldman Sachs head of Latin America economics Alberto Ramos told CNBC. “We have significant concerns about the fiscal picture of current and prospective inflation. It’s a work in progress, and most likely will require further rate hikes by the central bank.” Ramos’ view is in line with that of other economists, who widely forecast a rate hike next week on the back of stronger-than-expected second-quarter growth. To be sure, Ramos thinks Brazil’s rate-hiking cycle could be a short one, as the U.S. Fed begins easing monetary policy. While this macroeconomic environment isn’t the most supportive for local equities, Ramos is hopeful that a series of moderate rate hikes on a somewhat shorter hiking cycle will be enough to improve inflationary expectations. BCA Research’s Arthur Budaghyan agreed that the Brazilian central bank is unlikely to hike rates for very long. He also believes that the Banco Central will cut interest rates next year. But doing so could cause an economic downturn, he warned. “There is an underlying bias that we believe the new central bank will have towards more dovish monetary policy, so over the next two years the central bank in Brazil will be more dovish than warranted.” the firm’s chief strategist of emerging markets told CNBC in an interview. “As a result, inflation will not fall towards the target and will be always above the central bank’s target.” “When inflation is out of the bottle, it will either stay unhinged or it will require a recession to put the genie back into the bottle,” Budaghyan added. “It will require pain.” What to do? Against this backdrop, Budaghyan advises clients steer clear of Brazilian stocks in the near term. Others are more sanguine. Strategists at MRB Partners are overweight Brazilian stocks, noting that tighter policy in the country has been discounted by the market. They added that the country’s stock market traded at a steep discount was relative to other emerging markets. “Growth will remain resilient, which is already resulting in upgrades to 2025 EPS forecasts, while valuations are attractive, and stocks are oversold. Stay overweight,” they said. U.S. investors who want exposure to the Brazilian stock market can obtain it through the iShares MSCI Brazil ETF (EWZ) . The fund, which charges 0.59% in fees, is down 15% year to date.
