Brazilian stocks are surging on the prospect that a Flávio Bolsonaro victory could lead to a more fiscally conservative -- and market friendly -- Brazil. But with the runoff election still a few weeks away, investors would do well to approach the rally with a healthy dose of caution.
Bolsonaro, an ally of President Donald Trump and the eldest son of Brazil's imprisoned former President Jair Bolsonaro, received 47% of votes in Sunday's general election. Incumbent President Luiz Inácio Lula da Silva, who had been ahead in pre-election polls, got a 45.1% vote share. Because neither candidate reached the 50% needed for an outright victory, they will square off later this month.
"The 25 October runoff is not a foregone conclusion, but the arithmetic heavily favors Flávio," writes Gustavo Medeiros, who leads Global Macro Research at Ashmore Group. Many Brazilians who voted for a candidate that wasn't Lula or Bolsonaro voted for conservative candidates, and are thus more likely to vote for Bolsonaro than for Lula, analysts say.
The Ibovespa, Brazil's benchmark index, was up 8.6% on Monday, while the iShares MSCI Brazil exchange-traded fund was gaining 13%, on track for its largest percent increase since March 2020.
The rally comes down to investors' optimism that Bolsonaro will restructure Brazil's precarious fiscal health. The ratio of Brazil's gross public debt to GDP has risen from 71.4% when Lula took office in January 2023, to 81.9% as of June. Brazil's budget deficit has also been creeping up, coming in at about 9.5% of GDP over the 12 months through August 2026. Brazil's sovereign credit ratings sit in junk territory across all major rating firms.
While both candidates have been vague about their economic policies, investors see Bolsonaro as a more market-friendly candidate. He's campaigning on cutting public spending, paring down Brazil's debt, bringing in more foreign investment, improving ties with the U.S., and rolling back taxes. A Lula win would likely extend the current president's economic policies, which rely on raising tax revenue to support public spending and a subsidy-based industrial policy.
"The biggest challenge that the Lula government has faced, a challenge of its own making, has been its failure to really convince market participants that it was serious about fiscal reform," said Elizabeth Johnson, Managing Director of TS Lombard's Brazil research team. "We did have people around Lula talking about reforms, promising reforms, but we never really got a commitment from Lula."
In Bolsonaro, investors see the possibility of a more reform-minded government ahead, particularly because right-wing candidates did well in congressional races, giving Bolsonaro's Partido Liberal party an edge in both the Senate and Chamber of Deputies.
The advantage would be a boon for Bolsonaro's agenda were he to clinch a victory in the runoff election, but would pose a significant challenge for Lula if he were to win.
"One common strand to our pre-election analysis is that whoever wins the presidential election will face significant legislative hurdles to pushing reforms," writes William Jackson, chief emerging markets economist at Capital Economics. "The election result is a challenge to that -- Flávio will have more support in congress than we thought likely."
That is certain to give equities, bonds, and Brazil's currency, the real, a boost over the coming weeks. But election rallies are often short lived, and speculating chiefly around campaign speeches is hardly a long-term strategy.
When it comes to equities, Brazil's market is heavily weighted toward commodities, which means it often trades around commodity cycles. It's also not immune to broader global factors. The Ibovespa gained a total of 19.5% during Jair Bolsonaro's term. It's gained just under 70% in da Silva's current term, partially due to a strong commodity cycle driven by the AI buildout and geopolitical events, as well as a weaker dollar.
And as Jackson notes, the hurdles haven't gone away altogether. The scale of fiscal tightening needed to stabilize Brazil's debt levels will be politically unpopular, and Bolsonaro will still need to negotiate across coalitions, likely complicating the passage of sweeping reforms.
Medeiros agrees.
"A Flávio presidency would inherit a divided country," he says. "He is untested in executive office, his father will press for amnesty, and parts of the elite remain concerned about democratic institutions, even after a healthy alternation of power."
Bolsonaro would also inherit a problem that has plagued all his predecessors: reducing Brazil's dependency on China. China is Brazil's largest trading partner, with nearly a third of Brazilian exports ending up in China. That is becoming a sticking point for the U.S., which under the Trump administration has been looking to kick China out of the Western Hemisphere. Friction with Lula's government prompted the U.S. to impose a 25% tariff on Brazilian goods. Ties could improve under Bolsonaro, but the China question may remain unresolved.
"Obviously, Trump and Marco Rubio definitely wanted to see Brazil shift to the right," Johnson says. "For them, this is a key element. In terms of Brazil actually meeting the requirements that the Trump administration set out during the tariff negotiations, I think even Flavio is going to have a hard time meeting those requirements."