The outlook for Brazilian stocks is getting brighter, according to two major Wall Street banks. Strategists at JPMorgan and Deutsche Bank upgraded Brazil to overweight after right-wing presidential candidate Flávio Bolsonaro outpaced incumbent Luiz Inácio Lula Da Silva in an election held Sunday. Neither candidate received more than 50% of the vote, so a runoff will take place Oct. 25. Bolsonaro, son of former President Jair Bolsonaro, is seen by many as the more market-friendly alternative. He has pledged to lower taxes and curb government spending. Investors quickly cheered the first-round results. The Bovespa index , Brazil’s domestic stock market index, surged 7.7% on Monday — its biggest one-day gain since March 24, 2020. Back then, it soared 9.7%. The iShares MSCI Brazil ETF (EWZ) raced 12.5% higher on the day, marking is best daily performance since a 13% jump on March 17, 2020. JPMorgan and Deutsche Bank think there’s more upside ahead. EWZ YTD mountain EWZ year to date “With the results from the first round of the Brazilian elections, it is hard to ignore the impact on markets,” JPMorgan strategist Emy Shayo Cherman wrote. “This upside potential is better than what any other LatAm market can offer.” Cherman pointed to a stronger Brazilian real as a driver, which “could pave the way for more and faster [rate] cuts.” She added that the market “re-rating on the possibility of a more fiscally friendly macro policy is material.” Meanwhile, Deutsche Bank’s Nikolaj Lippmann noted that Brazilian stocks were deeply under-owned heading into the election, setting them up for more gains. “Brazilian investors have been crowded out of equities by record-high rates, with allocations to local equities now at ~5%—just above the all-time low of 4.6%, versus an 8.5% historical average and 15% peak,” Lippmann said in a note. “Elections open optionality for a new road: fiscal consolidation and a domestic slowdown that ultimately crowd in investment. The transition will likely take years, but the potential is significant.” For U.S. investors, there are several ways they can gain exposure to the Brazilian market. One of the easiest ones is through ETFs such as the EWZ. The fund is up 35% year to date following Monday’s rally. Several Brazilian companies also trade in the U.S., including: Itau Unibanco , Ambev , Banco Bradesco , Petrobras , Nu Holdings and Embraer . JPMorgan analyst Yuri Fernandes upgraded Banco Bradesco to overweight. “While we remain cautious on the near-term operating backdrop, we believe Bradesco offers a more compelling rebound setup from here, with valuation and sentiment already discounting a significant portion of near-term challenges,” Fernandes wrote to clients.
