Brazil - Election and the stock market in 2026

Brazil and other stock markets in Latam have gone nowhere for years.

Fast forward to 2026, Brazil is world leading in one measure - it has the highest real interest rate. Interest rate is around 13-14% vs. inflation of 4-5% (before Iran disruption).

Central Bank has to be especially "tough" because the Lula government is constantly pushing against the fiscal constraint. Government in Brazil is required to run a balanced budget but there are ways to play game with the definition. Kind of like Jim Chalmers saying labour is fiscally responsible despite spending money like a drunken sailor. Thus, Central Bank in Brazil has to be responsible adult and push real rate sky high to stop inflation, as well as protecting the currency.

With the high domestic interest rate, domestic equities have been less attractive relative to fixed income.

Following the first round of election (2 rounds in Brazil), market is betting that Lula will lose and Bolsonaro will prevail. The government will shift from the left to the right. See Pic 2. Bolsonaro won more votes than Lula (47% vs. 45%) in the first round. In the second round, the votes to other candidates will shift to Lula and Bolsonaro. The other candidates are mostly right leaning as well. Bolsonaro will need to win 3% of the other 8%. Market is speculating that these shifting votes will be enough to get Bolsonaro over the line to 50%.

Bolsonaro is seen as more pro-business. During his election campaign, he has pledged to tighten fiscal rules and 1.5% of GDP in spending cut. If he delivers, Central Bank will have more room to cut rates.

In addition, is the world on the verge of change ? Supply chain disruption. Higher energy prices ? Falling grades ? Are real assets on the verge of re-pricing ? Remember Brazil is a key exporter of commodities... Rising commodity prices will do wonder for the economy and the Real.

In the last cycle, interest rate dropped to as low as 2%..... Unlike many developed countries, if the thesis plays out, rates can come down a lot and there is a multi-year rate cut story.

Not to mention, domestic equities are cheap. Many stocks are sub 10X PE. Take the large domestic banks for example... Before the election news, the domestic banks are trading say 6X or so... 2X book.. 20% ROE... Div yield of around 8-9%... Growing loan book 5-10%.... Household debts are high... Domestic economy slowing under the high real interest rate... A little bit of NPL concern..... Interest rate cuts will resuscitate the domestic economy and bring animal interest back.

Last night, EWZ (Brazil ETF) jumped 13%. During the last bull cycle in Brazil (2002-2008), the market in Brazil went up over almost 15X. Here is a number to keep in mind... Population is around 213M. There are only 5-6M retail equities account... The equities culture is nascent..

The domestic economy will do well when commodities are re-priced higher in coming years IF the commodity inflection idea holds true.