Strong showing from Flávio Bolsonaro in Brazil’s first round of presidential elections sends stocks flying

Brazilian equities can outperform emerging markets as Flávio Bolsonaro’s unexpectedly strong electoral showing raises the prospect of a more conservative fiscal policy and lower yields.

• In the October 4 first round, Flávio took 47.0% in the runoff against Lula’s 45.1%, outperforming polls by about 5 percentage points; he would need roughly half of the 7.7% won by other mostly right-leaning candidates.
• The first-round leader has won every Brazilian runoff since 2002, while the Senate shifted sharply right: PSD seats fell from 14 to 5, the Liberal Party rose from 15 to 28, and a centre-right bloc controls 48 of 81 seats.
• The Ibovespa rose more than 12% in US-dollar terms the day after the results, and the authors’ rate-sensitive Brazilian equity holdings outperformed as yields fell.
• Flávio’s advisers proposed a R$190–200 billion spending cut, equivalent to about 1.5% of GDP, including administrative reform, the elimination of 10 ministries, fraud reduction and asset sales without cutting social benefits or pensions.
• Other proposals include raising infrastructure investment to R$500 billion per year, preserving Central Bank independence, revoking about 1,000 regulations and equalising the tax treatment of corporate debt to attract foreign credit.

Takeaway: The authors maintain a modest overweight to Brazilian equities and are shifting risk toward rate-sensitive names, arguing that cheap valuations and a more favourable political and fiscal backdrop could drive further outperformance, although the election outcome remains the key uncertainty.