Wall Street is pricing two sharply different outcomes for Brazil's markets depending on who wins Sunday's first-round presidential vote. A win for right-winger Flavio Bolsonaro points to gains in Brazilian bonds, the currency and stocks, while a Lula victory points the other way.
With the first round of Brazil's presidential election taking place Sunday, Wall Street is gearing up for starkly different market outcomes depending on the result of a neck-and-neck race. Eighty-year-old leftist incumbent Luiz Inacio Lula da Silva is running for a fourth term against 45-year-old Flavio Bolsonaro, son of former President Jair Bolsonaro. If neither candidate clears 50% of the vote, a runoff follows on Oct. 25.
Markets already lean toward a Bolsonaro win
In short, if Bolsonaro wins, Wall Street expects a rally in the country's bonds, currency and stocks. As Bolsonaro has closed the gap in the polls in recent months, Brazilian stocks have moved higher alongside his numbers, and Brazil's Bovespa index closed at 192,114.55, up 2.63% on Oct. 2. JPMorgan told clients the MSCI Brazil index rose 0.25% on average on each day Flavio gained in the polls.
Kalshi markets now show Bolsonaro favored to win 60% to Lula's 39%, though prediction markets are prohibited in Brazil and may not reflect local sentiment. As Fernando Marengo, chief economist at Black Toro Global Investments, put it: "The Brazil trade is: Does Lula win or does Bolsonaro win?"
The fiscal math behind the trade
Bolsonaro is the markets' favored candidate because he promises more fiscal discipline. Brazil's debt-to-GDP ratio stands at 81.9%, up 10% since Lula took office, and Citi's Brazil head economist, Leonardo Porto, said the country needs a permanent fiscal adjustment rather than one-off measures like asset privatizations.
That won't be simple: roughly 90% of Brazil's budget is mandatory spending. At 32%, the country already carries the highest tax burden in Latin America, according to the OECD.
JPMorgan points to the last reform cycle
JPMorgan looks to Jair Bolsonaro's 2016-2020 term, when pension reform raised the minimum retirement age to 65 for men and 60 for women, saving hundreds of billions of dollars. During that stretch, the bank says Brazil's two-year yields fell almost to 4.7% and equities gained 130%.
If reform returns, JPMorgan estimates rates could ease toward a neutral 6% in real terms and sees MSCI Brazil upside between 21% and 41%, with the forward P/E climbing from 8.6 toward 13.3, a level last seen in 2020. The currency call is split too: JPMorgan sees USD/BRL at 5.50 if Lula wins and 4.90 if Bolsonaro wins.
The entire lower house and a third of the upper house are also on the ballot, and the makeup of Congress will shape how much reform either winner can actually pass. Marengo points to Colombia and Peru, where pro-business election wins drove sharp moves in stocks, bonds and currencies, though he cautions some of that trade is already priced into Brazilian assets. Rising global interest rates and the risk of El Niño-driven crop damage for agricultural exporters remain key risks either way.
Source: CNBC
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