Brazil’s Stock Market Had a Knockout Year. More Gains Hinge on Political Change.

Brazil’s stock market had a very good year. (Alf Ribeiro / Dreamstime)

Rallies like the one Brazilian stocks have enjoyed this year don’t historically last long. The iShares MSCI Brazil exchange-traded fund’s 38% gain for 2025 more or less offset what it had lost in 2024. Over five years, it’s down nearly 15%.

And next year is an election year.

The Latin American giant had objective reasons to rebound in 2025: An unyieldingly hawkish central bank wrestled inflation back below 5% annually. Forecasts for gross-domestic-product growth increased anyway, to comfortably above 2%.

“Growth has been very resilient despite some of the world’s highest real rates,” says Nicolas Jaquier, a portfolio manager for emerging markets debt at asset manager Ninety One.

The main reason was the anticipated retirement of President Luiz Inácio Lula da Silva after elections next October. At 80, with two recent brain surgeries, Lula, as the left-leaning leader is widely known, looked like a literally weak candidate for an unprecedented fourth term.

“What’s driving the bull run this year is the prospect for change in 2026,” says Malcolm Dorson, head of emerging markets strategy at Global X ETFs.

Lula has been getting help from his adversaries, though. The latest boost came when imprisoned predecessor Jair Bolsonaro tapped his son Flavio to run in his place, instead of São Paulo state governor Tarcisio de Freitas, who the markets view as more electable. Brazilian stocks have dropped 10% since the Bolsonaros’ Dec. 5 announcement.

The country of 213 million has treaded water on its underlying fiscal difficulties during Lula’s latest term. His signature reform, raising the threshold for paying no income tax to 5,000 Brazilian real ($896) a month, will exempt at least 80% of the population, says Thierry Larose, portfolio manager for emerging markets local debt at Vontobel Asset Management. The revenue loss is offset by market-unfriendly hikes on top earners and dividends.

Treading water isn’t good enough with a third of state revenue already going to pay debt and most expenditures constitutionally mandated, indexed, or both, says Jaquier. “Given the massive scale of their deficit, they need fiscal tightening equal to 2% to 3% of GDP,” he estimates.

The election scenario could see further twists before the April deadline for the candidates to formally declare, however. Polls may persuade Jair Bolsonaro to pull Flavio. Or Freitas, who lately described himself as “loyal but not submissive” to Bolsonaro, could run without the kingmaker’s imprimatur. With the 50-year-old governor in, “the markets will rally like there’s no tomorrow,” Larose predicts.

Monetary loosening would provide an extra tailwind, Dorson adds. Brazil’s central bank hiked interest rates by 450 basis points to 15% over the past 15 months. “The economy is set to accelerate like a coiled spring once cuts start,” he says.

So long as Lula doesn’t spoil the party.

For now, investors are playing it cautiously. Global X is “marginally overweight Brazil in our global funds,” Dorson reports. His favored sector is financials, which account for about 40% of market capitalization. Market leader Itaú Unibanco has weathered high interest rates well and is poised to capitalize on that coiled spring of growth, he says. Rival Banco Bradesco is “cheap from a valuation perspective.”

On the fixed-income side, “expected rate cuts are already priced in,” Larose says. He is shifting Brazil exposure to longer-term bonds, foreseeing a “neutral” interest rate of 10% to 11%, eventually. For the moment, the presidential horse race is swamping fundamentals.

“Until April, everything is pure speculation,” Larose says.

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