Navigating Brazil-U.S. Trade Tensions: Where to Invest in Undervalued Sectors

The escalating trade dispute between Brazil and the U.S. under Presidents Lula and Trump has created volatility in global markets, but it has also exposed overlooked opportunities in Brazilian sectors poised to thrive amid geopolitical shifts. With tariffs now at the center of the conflict—50% on Brazilian imports under U.S. claims of an "unfair" trade imbalance—the focus turns to how Brazilian industries are adapting and where investors can capitalize on undervalued assets.

The Trade Tensions: A Misguided Conflict or Strategic Turning Point?

The U.S. has imposed a 50% tariff on Brazilian imports, citing a $7.4 billion goods trade surplus in 2024—a figure that undermines Trump's claim of a Brazilian "trade war" advantage. Brazil's retaliation, invoking its Economic Reciprocity Law, threatens equivalent tariffs on U.S. goods unless negotiations succeed. While the dispute risks escalating into a full-scale trade war, it has also forced Brazil to pivot toward alternative markets and accelerate domestic reforms.

Key Sectors Under Pressure—and How They're Adapting

1. Agriculture: Diversifying Beyond the U.S.

Brazil's agricultural exports to the U.S.—including coffee ($1.9 billion), orange juice ($637 million), and beef ($885 million)—are under immediate threat. However, the sector's resilience lies in its global reach.
- Opportunity: Brazil is redirecting exports to China, Europe, and the Middle East. Coffee exports to Asia rose 12% in 2024, while soybeans—critical to China's livestock industry—are seeing surging demand.
- Investment Pick: JBS SA (JBSS3), the world's largest beef exporter, is well-positioned to capitalize on Asian demand.

2. Commodities: Shifting to Asia

The U.S. tariffs on Brazilian steel ($4.9 billion in 2024 exports) and iron ore have been partially offset by rising demand from China and Africa. Meanwhile, Brazil's copper and crude oil sectors are benefiting from global energy transitions.
- Opportunity: Companies like Vale SA (VALE3), a dominant iron ore producer, and Petrobras (PETR4), Brazil's state-owned oil giant, are diversifying buyers.
- Investment Pick: Vale SA (VALE3), which trades at a 30% discount to its five-year average P/E, offers exposure to China's infrastructure boom.

3. Manufacturing: Reducing Reliance on U.S. Tech

Brazil's retaliatory tariffs on U.S. machinery and semiconductors have spurred domestic innovation and partnerships with Asian firms.
- Opportunity: The automotive sector, led by CSN Logística (rail and port infrastructure), and Magazine Luiza (e-commerce), is reducing reliance on U.S. imports.
- Investment Pick: Magazine Luiza (MGLU3), with its 8% dividend yield and dominant e-commerce presence, benefits from Brazil's shift toward local tech solutions.

The Undervalued Sectors to Watch

While the trade war creates short-term uncertainty, Brazil's equity markets offer compelling valuations. The MSCI Brazil Index trades at a forward P/E of 9.6x—30% below its 10-year average—despite low unemployment (6.8%) and controlled inflation (3.6% projected by 2026).

1. Financials: A Bargain in Banking

• Banco do Brasil (BBAS3), trading at 7x earnings, offers a 6.5% dividend yield. Its strong asset quality and government-backed stability make it a defensive play.

• Itaú Unibanco (ITUB4), Brazil's largest private bank, trades at a P/B of 1.2x, underscoring investor pessimism about political risks that may not materialize.

2. Consumer Staples: Stable Cash Flows

• Ambev (AMBV3), Latin America's top brewer, offers an 8% dividend yield and exposure to premiumization trends. Its valuation at 12x earnings ignores its global scale and cost discipline.

Risks and the Path Forward

• Geopolitical Risks: Lula's re-election campaign and Bolsonaro's legal battles could amplify volatility, but valuations already reflect worst-case scenarios.
• Currency Volatility: The Brazilian real's stability (USD/BRL around 5.5) hinges on inflation control, but a weaker currency could attract foreign buyers to undervalued stocks.

Investment Strategy: A Multi-Year Play

• ETF Exposure: The iShares MSCI Brazil ETF (EWZ) offers broad diversification.
• Sector Focus: Prioritize commodities (Vale, Petrobras), financials (Banco do Brasil), and consumer staples (Ambev).
• Time Horizon: A 3–5 year view is ideal to capture falling interest rates, reforms ahead of the 2026 elections, and earnings growth from trade diversification.

Conclusion

The Brazil-U.S. trade tensions, while disruptive, have revealed a market primed for strategic investment. With valuations at multi-year lows and sectors like agriculture and commodities pivoting to Asia, now is the time to position for Brazil's resurgence. The key lies in identifying companies that can navigate tariffs, leverage global demand, and thrive in a post-trade-war economy.