Investors can hardly escape AI these days.
No matter where you look or what stock you buy, it's almost certainly linked to the AI trade in some way.
That's even true of emerging market stocks.
These markets used to be focused on commodities and real assets. But in recent years, they've grown more exposed to tech... and more dependent on the AI boom.
But there's one notable exception...
Brazil's stock market is still focused on commodities and low on tech exposure. And it has been riding the commodity rally for big returns.
That changed last week. The Brazilian stock market fell 14% last Monday. But as we'll explain, this could turn out to be an incredible opportunity to buy...
The Surprising Upside Potential After a One-Day Crash in Brazil
Brazil's current economic and political situation is complicated, to say the least.
At an economic level, Brazil is mostly doing well. Commodity prices have soared in recent years. And since Brazil is a major commodity producer, the country's stock market has risen as a result.
But the political mess started making waves again last month. Brazil held the first round of its presidential election in early October. And in a surprise outcome, the right-wing candidate Flávio Bolsonaro received more votes than the incumbent, President Luiz Inácio Lula da Silva (commonly known as Lula).
Investors viewed Bolsonaro as a more pro-business candidate, like his father, former president Jair Bolsonaro. The benchmark Bovespa Index, also known as Ibovespa, jumped 8% on the news.
But the election wasn't over. The second round of voting was a runoff between those two candidates, held on Sunday, October 25. This time, Lula received more votes than Bolsonaro... and was reelected.
As you might expect, investors had the opposite reaction to this news. But the way down was far more dramatic.
Brazilian stocks crashed 14% last Monday. Take a look...
This was one of the worst days of trading ever for Brazil. The market gave back all its gains from the first round of the election... and then a lot more.
This is clearly a major shake-up for Brazil's political and economic landscape. But it might not be the negative sign we'd normally expect.
I went back and looked at similar one-day crashes for Brazilian stocks. Since 1995, we've seen four other unique crashes of 10% or more in a day. And in nearly all cases, Brazilian stocks stopped falling and soared higher in the months that followed...
Now, the typical return for Brazil's stock market is a bit misleading. Since 1995, the country's currency has lost roughly 80% of its value. So U.S. investors would have made much less than the typical 12% per year.
Still, the results after a massive one-day drop aren't what we'd expect. That's because these crashes have historically happened near market bottoms... leading to massive forward returns.
These setups led to gains of 16.9% over three months, 39.8% over six months, and 47.8% over a year. Regardless of the currency issue, that's massive outperformance.
Of course, the market would need to stabilize before we'd consider it a good investment.
But if things do change and prices begin moving higher again, history tells us we could see a big rally over the next year. That makes the Brazilian market one to watch closely in the coming weeks.
Good investing,
Brett Eversole
Further Reading
Politics and the stock market are often viewed as closely connected. But a look at market returns dating back to 1950 reveals the relationship isn't all that clear – and that election outcomes shouldn't dictate your investment decisions.
The U.S. has led the technology boom for nearly two decades. Meanwhile, Europe took a different path – prioritizing regulation over rapid innovation. That decision caused the continent to miss out on the tech-boom gains since 2000... But today, Europe's different makeup could become an advantage.