Brazil is expected to hold its presidential election on October 4. Last October, President Luiz Inacio Lula da Silva confirmed he will seek re-election this year, pursuing a fourth term in office. Among his challengers on the ballot is Senator Flavio Bolsonaro, the eldest son of former President Jair Bolsonaro. The elder Bolsonaro, who was a long-time ally of U.S. President Donald Trump, is legally barred from running after receiving a 27-year sentence at the Federal Police Superintendency in Brasilia for engaging in a failed coup attempt.
Recent polling cited by Reuters and commissioned by the brokerage Genial from Quaest indicates Lula leading in voting intentions. In a first-round scenario, the poll showed Lula with 36% support, ahead of Flavio Bolsonaro at 23% and Sao Paulo Governor Tarcisio de Freitas at 9%.
Against this political backdrop, Morgan Stanley analysts argue investors appear to be pricing in the possibility of a policy shift that would encourage a structural rebalancing of Brazil’s economy - moving the emphasis from domestic consumption toward investment. The analysts identify two primary drivers underpinning their bullish thesis for Brazilian equities: the expected policy reorientation and the start of an easing cycle by Brazil’s central bank in the first quarter.
On the bullish path, the firm expects an "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 singled out a group of rate-sensitive financial services names and consumer-facing firms they believe could benefit if that scenario plays out. Those names include Nubank, XP Inc, and BTG Pactual among financials, and consumer companies such as Mercadolibre and Cyrela.
However, the analysts also map out a meaningful downside scenario. In the bear case, they describe a situation of "higher for longer" interest rates driven by robust government spending across 2026 coupled with "policy continuity that keeps fiscal uncertainty high." The consequence, they warned, would be "Equity multiple compression coupled with a potential earnings recession in late 2026 and into 2027 pose material downside to equity markets."
Under this adverse outcome, Morgan Stanley prefers stocks with earnings denominated in hard currency and businesses viewed as more defensive. Examples cited are materials company Vale and aerospace and industrials firm Embraer, as well as telecommunications providers TIM and Telefonica Brasil.
The analysts caution traders that the potential rebalancing creates what they describe as the "widest risk-reward" dilemma. They quantify the divergence between their scenarios: in the bull case, Brazil’s main Ibovespa index could rise by 46% in Brazilian reals before the end of 2026, while a bear outcome could see a 42% fall. On average, their models point to a potential return of 21% or more.
For market participants, the path for Brazilian equities therefore hinges on two key variables highlighted by the note: the degree to which policy shifts favor investment over consumption, and the timing and extent of monetary easing from the central bank. Until those dynamics crystallize, analysts advise positioning that reflects both upside potential in rate-sensitive and consumer-exposed names and downside protection through hard-currency earners and defensive telecoms.