Caution ahead for Brazil’s presidential election

Adding to domestic and global uncertainties is the head-to-head presidential race, making the Brazilian market a challenging environment for investors leaning towards more defensive strategies.

Brazil will hold its most awaited presidential election this October. While there are four candidates, there are really two main and different ideologies going head-to-head. On one side, the incumbent president, Luiz Inácio Lula da Silva from the Partido dos Trabalhadores, will seek re-election. The other side representing Partido Liberal is Flávio Bolsonaro, son of former president Jair Bolsonaro.

Compared to the past few elections, Lula’s approval ratings have been low though it has improved in recent polls. It may seem that he could be the forerunner in this presidential race, though his re-election could prove to be challenging due to the problems that arose during his current term. Among the issues awaiting the next president include the slowdown of the Brazilian economy due to the prolonged high interest rate environment that will be felt for the next few months, the US’ renewed tariff war with no agreement in sight, and the concerning fiscal scenario due to public spending increases.

Although Brazil’s domestic growth may be viewed as a good indicator for Lula, looking only at this aspect may paint a wrong picture of the country’s economic landscape. During the second quarter of 2026, the economy recorded a 0.5 per cent expansion in the second quarter, missing expectations of a 0.8 per cent pace and easing from the 1.1 per cent growth in the first quarter. As the Banco Central do Brasil eases its pace of interest rate reduction, the full impact on industrial activity is expected to permeate in the next two to three quarters. This means that the full effects of a 14 per cent nominal rate would be felt by the time the next president is chosen.

Another roadblock to Lula’s victory is inflation. Although there have been improvements in the job market, upward price adjustments affect real incomes and incentivises the central bank to slow down its easing cycle in order to hit its inflation target. With the closure of the Hormuz Strait, rising global fuel prices have also pushed Brazil’s main inflation indices higher.

Trump vs Lula

The return of the US’ tariff war since 2025 adds to the pile of problems that Lula must overcome if he wants to be re-elected. After a first round of tariff escalation in the beginning of the year, new duties in July included an additional 12.5 per cent tariff for Brazilian goods just a couple of days after the White House slapped a 25 per cent tariff on a wide range of Brazilian products.

At face value, the tariffs may seem like the US’ usual protectionist measures against supposedly unfair trade policies and job displacements. However, Lula interprets these tariffs as politically charged. After the announcement of the new duties, Lula commented that US President Donald Trump may be favouring Bolsonaro, given that Trump had been allies with Bolsonaro’s father when the latter was president.

Additional tariffs or none, Graph 1 shows that although Brazilian exports to the US have had its downs over the past few years, the general trend over the last two decades has been an increase in the value of outbound shipments. Despite Brazil strengthening its trade ties with China since 2025, the US remains to be an important trade partner as it comprises 16 per cent of the country’s total export value.

Restoring confidence

Lula’s latest presidential term also saw waning business optimism. Monthly readings under Brazil’s Business Confidence Index (ICEI) has been settling below the neutral threshold of 50 points since 2025, as shown in Graph 2. Most recently, the ICEI fell from 46.7 in June to 44.4 in July, followed by some recovery to 46.3 in August.

In addition, market concerns have intensified amid perceptions that the Lula administration is advancing measures that will incur high fiscal costs, including economic stimulus measures already totalling to USD 56 billion this year alone. Such initiatives include the Move Brasil program amounting to BRL 30 billion (USD 5.9 billion) in credit to help ride-hailing and delivery drivers purchase vehicles for work, and the Novo Desenrola Brasil program to refinance family debt.

Domestically, the financial sector faces headwinds ahead: as the risk premium rises for local risk assets, financing conditions tighten and may push credit costs up – and this may be discouraging for more conservative investors. Meanwhile, fixed-income instruments such as Agribusiness Receivables Certificates, Real Estate Receivables Certificates, and Financial Bills continue to offer attractive returns amid a high-volatility scenario, although not spared from credit risks. Looking ahead, companies with longer-duration cash flows, higher leverage, and higher capital requirements may benefit from the central bank’s easing cycle given that lower long-term financing costs may support stock valuations and generate medium-term returns.

This original article has been produced in-house for Lundgreen’s Investor Insights by on-the-ground contributors of the region. The insight provided is informed with accurate data from reliable sources and has gone through various processes to ensure that the information upholds the integrity and values of the Lundgreen’s brand.