The Brazilian stock market has seen a significant rally since January 2025, following a broader re-rating of emerging markets. The Ibovespa, the Brazilian market’s benchmark index, has gained approximately 60% since January 1, 2025. This performance is not merely currency-driven, as the market has fared even better in dollar terms, posting a gain of around 100%.
Brazil has already rallied significantly, but remains far from expensive
Despite this surge, the Brazilian equity market remains one of the cheapest in the G20, with a Shiller PE ratio of approximately 14x (market capitalization relative to normalized earnings over the last ten years). Only Turkey shows a lower valuation (9x), though this is due to a highly unstable macroeconomic environment marked by multi-year double-digit inflation. For comparison, China carries a Shiller P/E of around 15x, South Africa approximately 23x, and India around 31x.
This low valuation is compelling, as the October presidential elections could serve as a catalyst for a re-rating of the Brazilian market. Indeed, the incumbent president, Luiz Inácio Lula da Silva, has been losing ground for several months on betting sites such as Polymarket to a candidate perceived as more market-friendly: none other than the son of former President Bolsonaro, Flávio Bolsonaro. The two candidates are now neck-and-neck in the polls, with recent momentum favoring the right-wing candidate.
The real catalyst could now come from the presidential election
Recent examples elsewhere in South America, most notably Argentina in 2023, suggest that a Flávio Bolsonaro victory could be the most positive outcome for the Brazilian stock market. This seems all the more plausible given that the primary headwind for the Brazilian economy remains an excessive public deficit, hovering around 8% in 2025 for the third consecutive year.
Market participants may begin pricing in this scenario, as markets historically tend to anticipate election outcomes six months in advance. Should the recent momentum in favor of Bolsonaro persist, we could see a continued upward valuation of the Brazilian market.
Furthermore, given the Bolsonaro camp’s proximity to Donald Trump, a Flávio Bolsonaro victory would likely reduce the risk of renewed trade tensions between Washington and Brasilia.
The stocks most likely to benefit from a more favorable Brazilian scenario are financials, specifically Itaú Unibanco, Bradesco, Banco do Brasil, and Santander Brasil. An improved fiscal framework and a more sustainable decline in inflation would provide the central bank with more room to accelerate rate cuts, supporting credit growth, asset quality, and potentially a sector-wide re-rating.
The Brazilian bet remains attractive, but not without blind spots
However, the Brazilian market is not without risk. The primary risk remains fiscal: the IMF continues to highlight high public debt levels and spending rigidities that limit the government’s room for maneuver. The second risk is monetary: while the central bank began cutting its policy rate in March 2026 to 14.75%, it remains cautious due to inflationary uncertainties. The third risk is currency-related: the real can remain volatile, directly impacting inflation and, consequently, interest rates. Finally, one must account for political and regulatory risks, the market’s heavy exposure to commodities and Chinese demand, and governance standards that are less predictable than in developed markets.
