Brazil’s election puts a potential 41% stock rally against a fiscal squeeze

Brazilian stocks have been trading partly on one candidate’s polling gains. JPMorgan estimates that the MSCI Brazil equity index rose an average of 0.25% on days when Flavio Bolsonaro gained in the polls, according to CNBC Economy (direct). That link captures the stakes investors see in his presidential contest with Luiz Inacio Lula da Silva: a possible rally in stocks, bonds and the currency, set against a difficult fight over public finances.

CNBC reports that the first round takes place Sunday, with Lula seeking a fourth term against Bolsonaro, the son of former President Jair Bolsonaro. If neither wins more than 50% of the vote, the contest moves to an Oct. 25 runoff. Fernando Marengo, chief economist at Black Toro Global Investments, frames the central market question as which candidate wins. Investors favor Bolsonaro because he is promising tighter control over government finances.

A reform rally comes with conditions

JPMorgan’s more optimistic outlook depends on Bolsonaro winning and delivering a substantial reform program. Under that scenario, its analysts see potential gains of 21% to 41% for MSCI Brazil. They also envisage interest rates falling toward levels they consider neutral—neither stimulating nor restraining the economy—of 10% before inflation and 6% after inflation. The index’s forward price-to-earnings ratio, which compares share prices with expected profits, could climb from 8.6 to as much as 13.3.

The bank’s currency forecasts underline the divide. It sees the dollar buying 5.50 Brazilian reais after a Lula victory, against 4.90 after a Bolsonaro win. The lower figure means a stronger Brazilian currency. But some optimism may already be reflected in prices, Marengo cautions. He points to rallies in other Latin American markets after victories by pro-business candidates as examples of the opportunity investors are weighing.

Prediction platform Kalshi puts Bolsonaro’s chances at 60%, compared with 39% for Lula, CNBC reports. Those figures come with an important limitation: prediction markets are prohibited in Brazil and may not capture local sentiment. Richard Lapper, a senior adviser at Aurora Macro Strategies, says the balance has moved toward Bolsonaro over the past month, but less decisively than those markets suggest. CNBC disclosed a commercial relationship with Kalshi that includes customer acquisition and a minority investment.

The budget is the harder contest

The fiscal challenge would remain after the votes are counted. Public debt stands at 81.9% of gross domestic product, a measure of the economy’s output. Leonardo Porto, Citi’s chief economist for Brazil, says a fiscal adjustment of 3% to 3.5% is needed to stabilize debt relative to GDP. Selling state assets or relying on other one-off measures would not be enough, he argues.

“Brazil needs a permanent fiscal adjustment,” said Leonardo Porto, Citi’s Brazil head economist.

That leaves spending cuts or higher taxes, both difficult options. Roughly 90% of the budget is mandatory, with some spending protected by the constitution. Meanwhile, Brazil’s tax burden is already 32%, the highest in Latin America according to the OECD, and growth prospects are weak. These constraints make the gap between campaign promises and workable reform central to the market outlook.

Investors will also be watching the legislature: the entire lower house and one-third of the upper house are being elected, and their composition will help determine whether reforms can pass. Beyond politics, rising global interest rates and potential El Niño damage to agricultural exports remain risks. The next test is therefore not just who wins, but whether the winner has the political room to deliver lasting budget changes.