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SearchThe first round of elections boosted Brazilian stocks and the real, prompting Citi, JPMorgan, and Morgan Stanley to propose new strategies. The upside potential will depend on whether expectations of fiscal discipline and reforms translate into concrete measures.
The first round of the Brazilian presidential elections triggered a strong reaction in the markets. In the subsequent trading session, the Ibovespa rose by 7.7%, reaching a high of 206,911 points, while the real appreciated by 4.12% against the dollar. Banks and other companies exposed to the local economy led part of the advance, in a move that reflected political expectations rather than changes already executed in economic policy.
The result surprised the market: Flávio Bolsonaro obtained 47.03% of the valid votes and Luiz Inácio Lula da Silva, 45.16%. Both advanced to the runoff. At the same time, the advance of right-wing forces in Congress fueled among investors the possibility of a government more favorable to fiscal adjustment and economic reforms.
Various financial institutions proposed strategies to capitalize on a potential second stage of the rally. Citi described a previous operation with a digital option on USD/BRL and noted that it decided to add exposure to Brazil after the electoral reaction, thereby increasing its existing Brazilian risk according to Bloomberg Línea coverage. Its thesis contemplates improvements in fiscal policy, privatizations, and lower financing costs, although those outcomes depend on future decisions.
Citi also described an operation with Ibovespa futures: an entry at 208,990 points, a target of 250,000, and a monitoring level of 190,000. The figure is a position and a scenario for that entity, not a guaranteed forecast or an observed result.
JPMorgan raised its recommendation on Brazilian stocks from “neutral” to “overweight” and calculated that the MSCI Brazil could advance around 12% in the short term, with a potential valuation of up to 20% subsequently. In another analysis, it estimated that the 12-month price-earnings multiple could move from 8.9 to around 10.9 times. The bank also suggested that the exchange rate could test 5 reais per dollar and considered it possible that it would reach 4.80 in the following weeks.
Morgan Stanley set its target for the Ibovespa at 250,000 points under a favorable scenario, compared to a previous reference of 192,000. For the real, it first described the possibility of a break below levels close to 4.90 reais per dollar and, in a bullish scenario, an advance to 4.50 in the first quarter of 2027. These are expectations subject to the political and market conditions that the entity considers relevant.
The initial reaction was especially intense in several financial stocks: BTG Pactual advanced 22.52%, Bradesco 13.57%, Banco do Brasil 11%, and Itaú Unibanco 10.37%. Petrobras also rose, although Brent fell close to 2% on that day. The movements show where buying was concentrated, but they do not by themselves demonstrate that the earnings prospects of those companies have changed.
In its recommended portfolio for October, Santander increased the weighting of Petrobras from 12% to 17%, Itaú from 12% to 13%, Bradesco from 3% to 5%, and BTG Pactual from 6% to 7%. It also raised the participation of Localiza and RD Saúde, and replaced Direcional with Cyrela in construction. The entity linked those changes to a greater sensitivity to a possible improvement in the domestic market.
The theses on each company have their own conditions. Santander highlighted Itaú’s credit discipline, capital generation, and profitability; for BTG, it pointed to its exposure to capital markets. For Bradesco, the possibility of a results recovery coexists with the risk that credit deterioration pressures its earnings. For Localiza and Cyrela, more favorable financial conditions could help, but factors such as fleet utilization, sales, and project execution are also important.
The exposure of Banco Santander to Brazil, which represents approximately 20% of its total revenues according to XTB, helped explain the interest in the bank after the elections. Its shares rose as much as 3% in the session described by that firm. That stock market movement does not eliminate the risks of the Brazilian operation nor does it constitute a guarantee of the entity’s future performance.
Market optimism rests on the possibility that the perception of fiscal risk will decrease. Brazil combines high public debt with high interest rates; if investors expect greater budgetary discipline, they may demand lower yields to finance the State and companies. But an election does not automatically produce that improvement: the capacity of the next government to negotiate and implement measures will be decisive.
Analyses published before the vote underscored the dimension of the challenge. Goldman Sachs placed the total public sector deficit at 9.5% of GDP over twelve months and gross debt at 82.9% of GDP, according to Brazilian methodology. The bank estimated that structural primary surpluses exceeding 2% of output would be needed to steer debt toward a sustained reduction and considered it very unlikely to reach that level in the short term.
Bank of America calculated that stabilizing debt would require a primary surplus close to 3% of GDP under its growth and rate assumptions. It also warned that around 90% of the budget corresponds to mandatory spending, which limits the room for adjustment without political agreements and reforms.
Cautions were also heard among market analysts. Marco Saravalle, chief strategist at Krivo Capital, warned that a right-wing Congress does not necessarily imply one committed to fiscal discipline. Thierry Larose, portfolio manager at Vontobel, pointed out that it remains to be seen whether Bolsonaro would show greater fiscal responsibility than Lula, although he considered that, for the moment, markets would probably grant him the benefit of the doubt.
The initial advance captures an expectation of change, not the confirmation of an economic program. The composition of Congress, fiscal decisions, the selection of the economic team, and the capacity to approve reforms will influence whether the movement is sustained. Risks unrelated to politics also count: the evolution of credit, rates, and corporate financing conditions.
Therefore, the operations and targets disclosed by banks should be read as conditional scenarios and not as certainties. The reaction of prices reflects how investors reinterpreted the electoral result; the test for that valuation will be the distance between the promises of greater fiscal order and the measures that the next government manages to implement.
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