Brazil’s upcoming elections and the return of political uncertainty
With Brazil in the middle of a polarising political scenario, investors face a challenging environment in the markets that currently favour more defensive strategies.
Brazil is gearing up towards its presidential elections in October 2026 in which President Luiz Inácio Lula da Silva seeks re-election. However, the country’s main right-wing party has announced Flávio Bolsonaro, son of former president Jair Bolsonaro, as its candidate. Although Bolsonaro is not the market’s preferred choice, Lula’s approval ratings remain low compared to the previous years. Though the Brazilian economy has managed to sustain quarterly growth, it can no longer support the president’s approval rating , which raises market jitters regarding the chances of Lula’s re-election. This brings Brazil to yet another period of uncertainty regarding returns on domestic assets – one that investors can take advantage of.
Lingering fiscal concerns
Sustained GDP growth usually creates a good chance for an incumbent president to get re-elected. In Lula’s case, this positive effect seems to have completely disappeared as historically high interest rates are weighing against him. After expanding by 2.4 per cent during the second quarter of 2025, growth slowed to 1.8 per cent in the following quarter to mark four successive quarters of deceleration. One could say that this modest growth is a sign of stabilisation as the quarter also marked the 17th consecutive expansion. As the Banco Central do Brasil (BCB) kept interest rates unchanged at 15 per cent in January, the full impact on industrial activity – which led growth in the previous quarters – is expected to happen over the next two to three quarters, suggesting a further moderation in the sector’s growth. The tight monetary policy implemented since mid-2025 has already proven to be a pressing problem for the current president and, as its full effects materialise over the next few months, it may grow to impede Lula’s dream of getting re-elected.
Despite softening economic growth, the labour market remains resilient. By end-December, Brazil’s unemployment rate fell to 5.1 per cent, the lowest level since available survey data since 2012. This strong momentum can be used as a political campaign tool, especially since improvements in the job market have led to a record number of formally employed workers and the highest average real income of BRL 3,600 (USD 688). However, a strong job market amid easing GDP growth suggests that the BCB will have to reduce interest rates at a less hurried pace – otherwise, the best we will see is inflation at the upper limit of the 1.5-4.5 per cent tolerance range.
While the central bank remains committed to bringing inflation back to target, the federal government insists on the old policy of economic stimulus to boost Lula’s approval ratings. In 2025, Brazil’s headline inflation reached 4.26 per cent, below the upper tolerance limit of 4.5 per cent but well above the 3 per cent target.
Market concerns have intensified amid perceptions that the Lula administration may implement measures that carry high fiscal costs. Although interest rate cuts are expected in 2026, the pace of easing remains uncertain, especially with the elections looming on the horizon. Reactionary fears from investors are also reflected through the Bovespa index, Brazil’s stock market benchmark index. In the morning of 5 December, rumours of the younger Bolsonaro’s nomination began circulating and were later confirmed by himself and the president of the Liberal Party. The announcement threw cold water on investors and dragged the Bovespa index lower by 4.31 per cent that day, as seen in Graph 1.
Investors were expecting the current governor of São Paulo, Tarcísio de Freitas from the Republicanos party, to be announced as the main candidate of the right-wing parties. Freitas is perceived as the most capable of uniting the right-wing and centre electorate, as well as promoting reforms geared towards a more liberal economic approach. Initially, the announcement of Bolsonaro was seen as a bargaining chip wherein he would withdraw his candidature if Congress approves amnesty for his father – so far, his candidacy remains. Given this environment, the financial sector would be among the most penalized sectors as risk premiums rise for local assets, which means that more conservative investors are hedging for protection. Certificates of Deposit are offering fixed rates of up to 14.3 per cent per year for 12-month maturities, while bonds related to inflation yield up to IPCA+9.5 per cent, providing returns protected against consumer price spikes. Meanwhile, instruments such as Agribusiness Receivables Certificates, Real Estate Receivables Certificates, and Financial Bills continue to offer moderate returns in a scenario full of volatility.
Worries on political uncertainty
Industrial confidence has also weakened for the past few months as Brazil’s future leadership remains unsure. Graph 2 shows that the Business Confidence Index further slid from 48.3 in November to 48.0 in December 2025. Some recovery was observed in January to 48.5, though still below the historical average.
Polls are also reflecting the challenge that the current government must face. According to a survey conducted by Genial Investimentos, only 47 per cent of respondents approve of Lula’s administration against the 49 per cent that disapprove of his administration. Brazil votes in a two-round system to capture a presidential majority vote; considering voting intention, Lula would be re-elected in both the first and second voting rounds. However, in some simulations, his advantage is less than five percentage points, underscoring the highly competitive and polarised political environment.
Brazil’s domestic scenario can be challenging. However, zooming out onto the global scenario of a weak US dollar and the interest rate cuts by other central banks can bring opportunities for more risk-tolerant investors. Growth prospects stand strong for Brazil despite political headwinds ahead, though we advise investors to take well-considered risks – this means taking positions in companies in high-growth sectors to maximise 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.
