Wall Street closes at a record for the first time since end of January
Investing.com - Last October, Brazilian President Luiz Inacio Lula da Silva vowed to run for re-election this year, aiming for a fourth term in office.
Among his challenger in the ballot, which is set to take place on October 4 this year, will be Senator Flavio Bolsonaro, the eldest son of right-wing former President Jair Bolsonaro. The elder Bolsonaro -- a long-time ally of U.S. President Donald Trump -- is banned from seeking office as he serves a 27-year sentence at the Federal Police Superintendency in Brasilia for engaging in a failed coup attempt.
Lula was ahead of the Flavio Bolsonaro in voting intentions for the upcoming elections, a recent Quaest poll commissioned by the brokerage Genial and cited by Reuters showed.
The poll found that, in a first round scenario, Lula would have 36% of the vote, exceeding 23% for Flavio Bolsonaro and 9% for Sao Paolo Governor Tarcisio de Freitas, Reuters reported.
With the elections in mind, investors appear to be pricing in a policy shift that could trigger a "structural" rebalancing from domestic consumption to investment, analysts at Morgan Stanley said in a note. This trend, along with the start of an easing cycle by Brazil’s central bank in the first quarter, are seen as two main drivers of the "bull case" for Brazilian stocks this year.
"Equity multiple re-rating on the back of lower risk premiums, followed by earning growth reacceleration in 2027 support the path for equity gains," the analysts wrote.
They highlighted a range of "high-quality rate-sensitive financial services" stocks who could benefit from this outcome, including Nubank, XP Inc, BTG Pactual, as well as consumer names such as Mercadolibre and Cyrela.
On the other hand, the bear case for Brazilian stocks is characterized by "higher for longer" interest rates as a result of strong government spending throughout 2026 and "policy continuity that keeps fiscal uncertainty high," they said.
"Equity multiple compression coupled with a potential earnings recession in late 2026 and into 2027 pose material downside to equity markets," the analysts argued.
Against this backdrop, the analysts said they favor hard-currency earnings stocks like materials group Vale and industrials firm Embraer or defensive telecommunications companies such as TIM and Telefonica Brasil.
Still, the analysts warned that this possible rebalancing presents the "widest risk-reward" dilemma for traders.
In the bull case, Brazil’s main Ibovespa stock index is tipped to surge by 46% in Brazilian reals before the end of 2026, while bears see a 42% decline. The Morgan Stanley analysts forecast that the average could see a return of 21% or more.