Why have Brazilian assets rallied after the first round of elections?

Brazilian assets are rallying because markets expect a Bolsonaro victory and a more fiscally disciplined, market-friendly government, but the trade remains exposed to the runoff and policy execution.

• Flávio Bolsonaro received 47% of the vote against 45.2% for Lula on 4 October, while the Bovespa reached record highs and the Brazilian real gained nearly 5%, closing below five per US dollar.
• Brazil’s nominal deficit is about 9.5% of GDP and gross debt near 83% of GDP; with the Selic at 13.75% and long-dated futures near 14% against inflation expectations of about 5% this year and below 4% longer term, implied real rates were roughly 9–10%.
• Ten-year bonds have already rallied by about 100 basis points to around 13%, while the equity market trades at about 9.5x forward earnings after the rally, still below its historical average of roughly 11x.
• Bolsonaro’s Liberal Party won 19 of 54 contested Senate seats and will hold 28 of 81 seats from February 2027; right-leaning parties also secured a lower-house majority and 17 of 20 governorships.
• Lower rates would initially favour capital-markets firms, leveraged companies, utilities, malls, homebuilders and consumer-lending banks, while defensive stocks and exporters in metals and mining, pulp and paper, and industry could lag as a stronger real pressures margins.

Takeaway: The upside case is a fiscal adjustment that lowers the risk premium and allows faster Selic cuts, but investors should account for an undecided runoff, limited detail on Bolsonaro’s plans, unproven execution capacity, Lula’s potential appointment of Geraldo Alckmin as finance minister, and the possibility that much of the good news is already priced in.