Brazilian presidential candidate Luiz Inácio Lula da Silva's lead over Flávio Bolsonaro has narrowed, sparking increased interest in Brazilian stocks among some traders. A Quaest poll for TV Globo indicated Lula leading Bolsonaro 43% to 40% in a runoff scenario, a decrease from his 5-point lead earlier in the month and an 8-point lead in July. This shift is leading some investors to reassess their positions in the market.
Foreign investors have significantly reduced their exposure to Brazilian assets, with a record weekly outflow of $2.4 billion (R$12.6 billion) from stocks between August 10 and 14, the largest since 2008. Total outflows from March to June amounted to $4.2 billion, after inflows of $18.8 billion in January and February. As of August, net foreign inflows into Brazilian equities for the year have dropped to $3.5 billion (R$18.2 billion).
Despite the recent outflows and election uncertainty, some asset managers see a compelling opportunity in Brazilian equities. Christian Keleti of AlphaKey suggests that a change in government leading to a better fiscal outlook could trigger a substantial rally. He estimates that if just 3% of local money from CDI-linked investments shifts to the stock market, it could inject $96 billion (R$500 billion). Similarly, Scott Piper, CIO for Latin America at Itaú Securities, views Brazil as a value play, highlighting strong management, attractive implied total returns, and high dividends in Brazilian companies. He also notes that local managers have low equity exposure, creating an arbitrage opportunity.
However, persistent high real interest rates are a concern for equity investors. Daniela da Costa-Bulthuis from Robeco and Raphael Luescher from Vontobel Asset Management both point to the cautious stance of the Central Bank regarding Selic base rate cuts, indicating that monetary policy will remain restrictive. This elevated cost of capital is a structural obstacle to multiple expansion, causing domestic investors to remain underweight in equities as other asset classes offer more attractive returns. Nevertheless, Vontobel remains overweight in Brazilian equities in their emerging-market funds, driven by a long-term view and company fundamentals.
Analysts generally anticipate a Lula victory but are skeptical that either candidate will significantly alter the trajectory of Brazil's debt. Stabilizing the debt by 2031 would require a fiscal effort of at least 2.5 percentage points of GDP, or roughly $68 billion (R$350 billion), according to Roberto Secemski, chief Brazil economist at Barclays. Morgan Stanley suggests that the real's high carry could absorb more election pressure than in previous cycles, shifting repricing into domestic interest rates.
