Key Takeaways

• Markets priced in a more disciplined fiscal path as Bolsonaro’s lead came with strong conservative Senate and governor results.
• Rates should fall regardless of the winner, but how far depends on a credible fiscal plan.
• Our São Paulo meetings showed a cheap, lightly owned market, which helps explain the size of the move.
• We favor companies that can do well in any outcome, including high quality financials, healthcare and mall owners.
• Before the October 25 runoff, watch turnout, where other voters go, and who Bolsonaro names to run economic policy.

Flávio Bolsonaro's stronger-than-expected first round has markets pricing in a more orthodox fiscal path. We were in São Paulo just over a week before the vote. Here is what has to follow for that pricing to be right, and how we are thinking about the runoff and beyond.

Interest Rates Are the Story. Fiscal Policy Sets The Path.

Senator Flávio Bolsonaro won about 47% of the vote in the first round on October 4, ahead of President Lula at about 45%. He beat the polling average by more than four points and finished ahead in Brazil’s three largest states: São Paulo, Minas Gerais and Rio de Janeiro. A further surprise was how strongly conservative and center-right candidates fared in races for the Senate and for state governor. These results increase the odds of a Bolsonaro victory on October 25, which would include a stronger mandate to pass reforms, including tighter control of government spending.

Our view has not changed since before the vote: the path of interest rates matters more for Brazilian equities than who wins. The economy is slowing, with local bank forecasts putting growth at roughly 1–1.5% through 2027, and real rates are still around 9%, far above neutral. Rates should come down in most outcomes, but how far and how fast they fall depends on fiscal policy.

The central bank can only cut so far if the government keeps spending more than it collects. A believable budget plan gives it room to cut further, and a lower discount rate lifts stock valuations across the market even if earnings growth stays modest. Without one, cuts could be small, or stop altogether.

Markets responded immediately to Bolsonaro’s first-round lead. On October 5, the Ibovespa, Brazil’s main stock index, rose about 8%, the real gained more than 4% against the dollar, and long-term bond yields fell meaningfully.

Market Rally Reflects Fiscal Discipline Expectations

Markets are reacting to an expected economic program, not a person. Both campaigns have been light on discussing specific policies. However, in our conversations with senior management teams across the financial sector, we heard that experienced executives floated as potential members of Bolsonaro's economic team have been engaging directly with the banks about a market-friendly fiscal consolidation plan.

A larger conservative presence in the Senate makes fiscal legislation easier to pass. A government seen as committed to fiscal discipline lowers the rate at which investors discount Brazilian earnings. The test is delivery: a credible economic team named after the runoff, a plan with numbers attached, and a Congress that cooperates through 2027.

Here is how we see the outcomes potentially playing out.

These scenarios reflect VanEck's views as of October 2026 and are not predictions.

Cheap, Lightly Owned Market Amplified Market Move

We were in São Paulo in late September, meeting company executives, local investors, political analysts and bank economists. Our read on the result is shaped by three observations.

Positioning explains the size of the move. Local fund managers told us their industry had shrunk to about a third of its former size after years of 14–15% risk-free rates, and that sentiment had swung from gloomy to optimistic in about a month. Election-sensitive stocks had already risen 20–25% before the first round, while foreign investors had taken more than $20 billion out of Brazil since April. A cheap market with few owners, at about 8.5x expected earnings in September against a 10-year average of roughly 10, can move a long way in a day.

Credit stress is real but seems fairly concentrated in certain segments of the market, including agricultural lending, small-business lending and a subset of households that are finding it harder to keep up. The headline numbers overstate things somewhat. Brazil's central bank estimates that new accounting rules explain a significant portion of the rise in bad loans between December 2024 and June 2026. Lending discipline still matters. While lower rates should provide relief across the board, we favor banks that have been careful about who they lend to over the past few quarters and that provide resilient, high-quality exposure to Brazil’s growing financing and capital-markets businesses.

Brazilian companies are also stronger than the country's headlines suggest. Many management teams have steered their businesses through high interest rates, currency swings and political turmoil. Brazil has large energy and farming resources and a big domestic market, which should count for more as countries compete for resources and companies move supply chains closer to home.

Lower Rates May Move Brazilian Savings into Stocks

A longer-term shift beyond the runoff is where Brazilian savings go. With 14–15% available on bonds, there has been little reason to own stocks.

One of the country's largest wealth managers told us it expects the share of client assets in stocks to rise from 5–10% toward 15% as rates fall. That could be a multi-year source of demand for Brazilian equities, and its timing is tied to the same fiscal path the market is now pricing.

Banks, Healthcare and Malls Well-Positioned for Lower Rates

We are focused on companies we believe can hold up across most outcomes. Banks and other financial firms with strong balance sheets and careful underwriting are positioned to handle today's credit problems and may benefit as rates fall. Healthcare companies with a long runway for growth look attractively priced and may get a further lift from lower rates. Mall owners may also stand to gain, as their inflation-linked rents are worth more when rates come down.

The first-round result also makes us more constructive on domestic names such as homebuilders and businesses that benefit as more Brazilians invest in equities.

What Could Change Our View: Spending, Credit and Legal Fights

Before October 25 we are watching where the roughly 8% of votes for the eliminated candidates go, whether President Lula can mobilize some of the 21% who stayed home, and whether Bolsonaro signals who will run economic policy.

Beyond the vote, three things would change our view: government spending that keeps exceeding the budget, credit problems spreading beyond the pockets described above, or legal and political fights that use up the time needed for reform. If Lula wins and next year's budget looks like this year's, rates would likely stay high and the real would weaken. Higher-quality companies would hold up better than the market but would not be immune This is not our base case.

Brazil Offers Breadth and Value Beyond the AI Trade

Company earnings are growing across emerging markets, but investors have mostly focused on AI hardware makers in Korea and Taiwan. While we still see opportunity there, companies in other countries are also growing their profits and getting much less attention, which can leave their shares cheaper than they should be. We think Latin America is one of those places.

As investors look to broaden and diversify their exposure beyond AI, Brazil is worth a closer look. The country is rich in natural resources, with a large domestic market and a stock market that offers breadth and depth of sector representation and management quality, at a reasonable price.

We invest the same way whether we are looking at a chipmaker in Taiwan or a hospital group in Brazil. We look for companies that earn more on the money they invest than it costs them to raise it, that have advantages competitors cannot easily copy, and that have room to keep growing. Then we compare that with what the share price already assumes. Brazil has plenty of these companies, and many of them are cheaper than similar companies elsewhere. Election headlines will keep coming for the next three weeks, but over the long run we think company results will matter more.

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