How will Brazil’s markets respond to the election?

The experience from Brazil’s 2018 and 2022 elections is that a victory for Flávio Bolsonaro would support equities (a boost of 10-20% seems plausible) and pull local currency bond yields down sharply. A Lula victory might lead to equity market underperformance and, while the impact on bonds is less clear, scope for declines in yields would be limited. Perhaps counterintuitively, the real’s performance hasn’t tended to be driven by broad political shifts. Other factors such as commodity prices and rate differentials have been more important drivers and these point to depreciation next year, irrespective of the election outcome.