Brazil: Potential Positive Asymmetry Into the October Election

Brazilian equities offer positive asymmetry ahead of the October election because cheap valuations, high real rates, monetary easing and political optionality limit downside while preserving upside.

• Commodity producers represent 37% of the MSCI Brazil Index and 30% of the Ibovespa, while domestic banks account for 40% and 28%, respectively, giving Brazil exposure that is less tied to U.S. AI capital-expenditure cycles.
• Foreign investors withdrew about BRL3 billion from equities between August 11 and 18, following a BRL4.7 billion single-day outflow; the resulting roughly BRL13 billion monthly outflow was the third-largest since 2008, but current fundamentals do not resemble the Covid shock of 2020.
• The MSCI Brazil Index trades at 8.3 times forward earnings versus a 10-year average of 9.7 times and offers a dividend yield of about 7.0% versus a 5.6% average, suggesting that political risk is already substantially priced in.
• Brazil's real policy rate is approximately 9.3%, providing currency support, while the Selic rate has peaked and an easing cycle is under way; Global X's review of seven cutting cycles since 2000 found average gains of 96.7% in the four positive cycles versus average losses of 14.5% in the three negative cycles.
• The October 4 first round and potential October 25 runoff are close contests between Lula and Flávio Bolsonaro; a Lula victory may be constrained by a Centrão-controlled Congress, while the MSCI Brazil Index gained 7.8% after Bolsonaro's 2018 first-round result and Argentina's Merval rose 26.6% after Javier Milei's 2025 midterm victory.

Takeaway: The authors view recent selling as a technical, election-driven overreaction and prefer concentrated active exposure over passive beta because the index has more than 64% of its weight in ten names and material governance dispersion, although the upside depends on a decisive and sufficiently unpriced opposition victory.