Foreign investors are piling into Brazil’s stock market, seeking to capitalize on discounted valuations and political shifts that could mirror Argentina’s recent rally. UBS Wealth upgraded Brazilian equities in June, citing expectations of monetary easing by the central bank. Since then, the Ibovespa index has surged 5%, pushing its year-to-date gains to 19% and reaching record highs, fueling optimism of further upside.

Investment managers say missing a Brazil rally would be far riskier than missing Argentina’s, given the size of the market and its influence on emerging markets portfolios. Ronaldo Patah of UBS Global Wealth Management noted that Brazil’s index hitting new highs is already spurring some profit-taking, but investors continue to buy in anticipation of lower interest rates both locally and in the United States.

The enthusiasm is fueled by political speculation, as polls show President Luiz Inácio Lula da Silva’s approval slipping, raising hopes for a more market-friendly candidate. Sao Paulo Governor Tarcísio de Freitas has been floated as a potential contender, and his possible candidacy is already seen by traders as a positive trigger for Brazilian assets.

Investors are drawing comparisons to Argentina’s election cycle, where traders bet early that voters would abandon left-wing Peronists in favor of a pro-market leader. The Merval Index rose 142% in 2022 and exploded by 360% during the 2023 election year after Javier Milei’s victory. Many believe Brazil could deliver similar once-in-a-lifetime gains if political and monetary conditions align.

Still, analysts caution that major uncertainties remain. While Lula has sought to boost Brazil’s trade standing against U.S. tariffs, his slipping approval rating adds to political risks. A recent AtlasIntel poll showed him trailing Freitas in a hypothetical runoff, with 48.4% to 46.6%. Market watchers warn that while optimism is driving record inflows, the sustainability of Brazil’s rally will depend on both stable policy shifts and the outcome of next year’s election.

Source: Bloomberg.