The strong rally in Brazilian equities following the first round of the presidential election reinforced international firms’ positive view on the country’s stocks. In analyses distributed after the vote, a range of international investment houses point to fundamentals supporting a continuation of the movement, backed by expectations of greater fiscal discipline, lower interest rates, and a resurgence of investor interest in companies linked to the domestic economy. The realization of this scenario, however, will depend on the next government’s proposals and its ability to execute them.
The Ibovespa advanced 7.70% on Monday, October 5, closing the first post-election session at 206,911.89 points. The reaction occurred after Flávio Bolsonaro finished the first round ahead of Luiz Inácio “Lula” da Silva, contradicting the president’s lead shown in some polls. The movement was accompanied by a drop in future interest rates and an appreciation of the real.
Foreign flows also gathered strength: international investors made net contributions of 10.06 billion reais into Brazilian equities during that session, the largest daily balance in the series tracked by Bloomberg since 2008.
UBS Sees Upside Potential Exceeding 30%
In the report published prior to the market open on Monday, UBS moved to adopt a “deeper and more lasting” fiscal adjustment as its base-case scenario. For the team, the higher probability of a change in government, combined with the composition of the new Congress, increases the chances of a credible fiscal anchor featuring spending control, a revision of indexation mechanisms, and a reliable trajectory of primary surpluses.
“We believe that domestic-linked equities, local interest rates, and the Brazilian real—in that order—should benefit substantially from a higher probability of this fiscal scenario,” states the report, signed by Alejo Czerwonko, Luciano Telo, Solange Srour, Ronaldo Patah, and Debora Nogueira.
According to UBS’s evaluation, the Brazilian market was trading at 8.7 times forward earnings, below its ten-year historical average of 9.7 times. If the fiscal scenario is confirmed, this multiple could approach 11.8 times.
“Combined with lower real interest rates influencing earnings expectations, this could translate into an upside potential exceeding 30% for the index over the coming months,” the team writes.
The estimate was formulated prior to the post-election session jump and therefore does not represent a projection of an additional 30% gain on top of post-rally prices.
Banks, retail, real estate developers, utilities, education, healthcare, and small caps are among the segments most sensitive to this shift. UBS also identifies room for a rotation out of oil stocks and into companies tied to domestic activity.
“If past election cycles serve as a benchmark, equity re-ratings would likely extend throughout the entire first year of the new administration, far beyond the initial post-election rally, as reform proposals advance through Congress and markets gain confidence in policy execution,” the report states.
Julius Baer Maintains Overweight Position
Julius Baer maintained its overweight recommendation on Brazilian equities. According to Nenad Dinic from the equity strategy area, the election outcome began resolving the risk-reward asymmetry identified prior to the vote in favor of the bullish thesis.
“We maintain our overweight position. The asymmetric risk-reward profile we identified before the first round is beginning to resolve in favor of our bullish thesis, with a Bolsonaro victory likely favoring faster fiscal consolidation, lower long-term interest rates, and an accelerated monetary easing cycle,” he states.
The combination of high real interest rates and low multiples offers, according to the firm, significant room for an equity re-rating.
“With real interest rates currently around 10% and local equities trading at 8.7 times forward earnings, the re-rating potential is substantial,” Dinic writes.
The strategist emphasizes, however, that electoral uncertainty should persist until the second round on October 25. Debates and initial details on fiscal proposals will remain at the center of investor attention.
Franklin Templeton Reaffirms Positive Outlook
Franklin Templeton also reaffirmed its favorable view on Brazilian equities. Larry Hatheway, Head of Research at the Franklin Templeton Institute, links this perspective to attractive valuations, earnings growth, and the possibility of falling inflation and bond yields.
“Attractive valuations for Brazilian equities and earnings growth, together with a backdrop of likely declines in inflation and bond yields, reaffirm our positive outlook on Brazilian equities,” he states.
This reading forms part of a broader conviction within the institution that investors should diversify their equity holdings beyond the United States, including emerging markets.
In local-currency Brazilian debt, Hatheway maintains a favorable assessment but adopts greater caution following asset appreciation.
“Most of the returns we anticipated between now and year-end have already materialized. Therefore, while we remain positive, we are now slightly more cautious regarding future returns,” he explains.
Aubrey Highlights Domestic Investor Capital
For Rob Brewis, Director and Manager at Aubrey Capital Management, the composition of Congress will be important for enabling deeper fiscal reforms.
“A deeper fiscal reform would need its support, and we would expect the Senate taking office next year to be more open to it than the current one,” he states.
Beyond foreign flows, Brewis highlights a potential domestic driver for the stock market. With high real interest rates, local investors had little incentive to shift resources from fixed income into equities. A shift in this landscape could expand demand for the asset class.
“The story for Brazilian equities is domestic. Local savers hold most of their money in fixed-income securities, and with real interest rates so elevated, there has been little reason to change,” he says.
“The test is knowing whether there will be fiscal discipline. If there is, and interest rates come down, we believe even a modest migration out of fixed income could, over time, represent a significant boost for equities,” he adds.
Vontobel Sees Revaluation Beyond the Stock Market
Thierry Larose, Portfolio Manager and Analyst at Vontobel, identifies a relief movement reaching across different markets. In comments sent following the initial reaction to the results, he highlighted the real’s appreciation of over 4% against the dollar, a drop of more than 100 basis points in DI futures yields compared to Friday’s close, and a tightening of credit spreads between 20 and 25 basis points.
“Investor confidence is boosted by expectations that the new government will quickly present a strong economic team, ambitious fiscal adjustment targets, and a constitutional amendment proposal shortly after the election,” he states.
The assessment continues Vontobel’s pre-election reading, which had already identified a favorable risk-reward ratio in fixed-rate government bonds.
“In our assessment, yields could compress considerably more under a Bolsonaro victory scenario than they might rise under a Lula re-election. In our view, this creates a very attractive asymmetric risk-return profile,” the firm noted.
Janus Henderson: The Market Will Demand Execution
Despite the favorable reaction, Janus Henderson emphasizes that the election results must still translate into concrete economic measures.
Thomas Haugaard, Portfolio Manager on the hard-currency emerging market debt team, considers that the first round increased the likelihood of a more market-friendly orientation. However, detailed fiscal proposals remain limited.
“Neither campaign has yet provided sufficient clarity regarding the pace, composition, or policy implementation of the adjustment,” he states.
For Haugaard, fiscal credibility remains the primary medium-term variable. A disciplined program could reduce the sovereign risk premium, improve debt dynamics, and encourage capital inflows.
“The market will ultimately demand policy execution, not merely campaign signals,” he underscores.
Aberdeen Demands Credible Proposals
Viktor Szabó, Investment Director of Fixed Income at Aberdeen Investments, also places the fiscal issue at the core of the analysis. While he considers that the new congressional composition could facilitate coalition building under an eventual Bolsonaro presidency, he emphasizes that the contest remains open.
“For markets, however, the central question remains Brazil’s fiscal outlook—its long-standing Achilles’ heel,” he states.
“Bolsonaro now needs to demonstrate that market expectations regarding stronger primary balances and fiscal reform are backed by credible proposals, rather than campaign rhetoric,” he adds.
In Szabó’s assessment, commitments made during the second-round campaign will carry more weight for markets than initial political momentum.
“The promises and commitments both candidates make over the next three weeks will matter more than the political momentum dominating the headlines,” he states.
Ebury Warns About the Duration of the “Honeymoon”
In the currency market, Diego Barnuevo, Senior Market Analyst at Ebury, sees room for a positive reaction from Brazilian assets driven by expectations of fiscal consolidation.
“The first-round surprise should initially translate into a positive reaction for Brazilian assets, including the real, supported by expectations of a more aggressive fiscal consolidation and a more sustainable growth model under an eventual Bolsonaro presidency,” he states.
The fintech considers, however, that the burden of mandatory spending limits the ability to execute significant expenditure cuts. If Bolsonaro wins, investor focus should shift toward government composition and the fulfillment of fiscal commitments.
“Fiscal announcements have so far been notably vague. Any disappointment on this front could quickly shorten the real’s honeymoon period,” Barnuevo warns.
Among international firms, expectations of fiscal adjustment and lower interest rates underpin the favorable outlook for Brazilian assets. The continuation of this movement will depend, however, on translating electoral expectations into an economic agenda capable of securing political support and producing results.
