It cannot be described as a perfect scenario, as numerous challenges still exist within the Brazilian economy. However, several global and domestic factors have aligned during the first half of 2026 to make the Brazilian market the world’s leading destination for foreign investment, according to the analysis of Caio Megale, Chief Economist at XP Investimentos.
During his participation in a panel at the 15th Investment Seminar for EFPCs, organized by Abrapp (Brazilian Association of Closed Supplementary Pension Entities), the economist explained that the country has successfully weathered the crises stemming from the “tariff shock” and has benefited from the global rise in oil prices.
“Brazil has become a major magnet for global investment. Investors perceive that the country emerged well from the tariff crisis, gained market share relative to China, and maintained its position in the United States,” said Megale. According to him, January and February saw the largest inflow of international capital in the recent history of the domestic market. “Markets soared during those two months,” he stated.
In March, war came to dominate the global financial agenda and oil prices surged. The economist from XP recalled that at the beginning of the year, the asset manager viewed a drop in oil prices as one of the main risks for Brazil, since it could have reduced fiscal revenues and exports. However, the scenario evolved in the opposite direction.
With the start of the conflict, oil surpassed 100 dollars per barrel and has remained at those levels. Although a short war and the reopening of the Strait of Hormuz were initially expected, that did not happen. In this context, Brazil is seen as a relative winner. Since the discovery of the pre-salt reserves, oil has gained significant weight in the country’s trade balance and fiscal revenues.
“The impact of rising oil prices on most countries is usually negative for GDP. Only in Brazil and Russia does it tend to boost it. In relative terms, Brazil is well positioned. The trade balance is accelerating its surplus, fiscal revenues have increased, and the government is trying to use those resources to soften the effects of the domestic crisis,” Megale analyzed. He added that domestic markets continue to perform well, although not with the same intensity as during the first two months of the year, with particularly strong performances in equities and foreign exchange.
Brazilian real sees strong appreciation
Under the current outlook, especially from the perspective of foreign investors, Brazil is perceived as a winner. “Brazilian markets are performing well, for example equities and the exchange rate,” Megale pointed out. “If you ask me whether the dollar looks more likely to trade at 4.50 reais or 5.50, I would choose the first option,” he added.
The economist recalled that last year the dollar weakened globally and the real benefited from that trend. However, this year the dollar is strengthening worldwide and, even so, the real continues to appreciate against other currencies. As a result, in 2026 the real would be experiencing a “double” appreciation.
Record foreign capital inflows and market outlook
Roberto Belchior, partner at Tarpon, who also participated in the seminar, noted that a year ago few could have anticipated the sharp rebound of the Ibovespa beginning in the second half of 2025. This rally was mainly driven by the massive inflow of foreign capital — around 200 billion reais in recent months — while domestic institutional investors moved in the opposite direction, with withdrawals close to 100 billion reais since 2024.
The asset manager agrees that Brazil could become one of the main long-term structural winners in global markets. He even foresees a new bull cycle for Brazilian equities similar to the one experienced between 2002 and 2008. Since the largest gains have been concentrated in the most liquid stocks, Belchior is now betting on the potential of small caps, which are underperforming the Ibovespa by around 20%.
Domestic challenges: inflation and interest rates
To improve the economic outlook, the Selic rate would need to begin falling, especially in real terms. However, according to Megale, inflationary pressures persist due to oil prices, food prices — with the possible emergence of El Niño in the second half of the year, which could affect supply — and a demand shock driven by government policies aimed at increasing consumers’ disposable income.
All of this complicates the central bank’s task. “It still makes sense to cut the Selic because rates are very high, but the Central Bank will have to do so more gradually,” he summarized.
Inflationary pressure is global. Central banks have reversed the trend of rate cuts, sovereign bond yields have risen in developed economies, and this movement has also impacted emerging markets. Yield curves have steepened across all markets, including Brazil.
Elections and risk perception
At the beginning of the year, XP Investimentos projected a dollar exchange rate of around 5.60 reais, incorporating electoral risk. However, that view has changed. “The flow into Brazil is so strong that there is now a perception that the elections will not be as decisive,” Megale explained.
According to his analysis, both President Lula and a possible alternative represented by Flávio Bolsonaro are relatively familiar scenarios for investors, reducing uncertainty. “Economic factors appear to carry more weight in global appetite for Brazil,” he added.
XP’s political analyst, Paulo Gama, expects a very close electoral race. He highlighted that Flávio Bolsonaro has reduced his rejection levels and is trying to position himself as a more moderate option, while Lula’s government seeks to strengthen support through economic and fiscal measures.
Beyond the electoral cycle, both analysts agree that the main challenge will be the growth of public spending beginning in 2027, regardless of who governs. For Megale, that year will be marked by fiscal adjustment with a negative impact on economic growth. In this context, the Central Bank would maintain interest rates at elevated levels, around 13.5%-14% in the short term. Only from the second half of 2026 — or more likely in 2027 — could a clearer cycle of rate cuts begin, depending on the evolution of inflation and fiscal adjustment.
By Fórmate a Fondo