Volatility in Brazilian markets following President Luiz Inácio Lula da Silva’s reelection has increased investor interest in protective assets and portfolio diversification, according to analysts cited by Folha. Suggested options include government bonds and bank-issued CDBs, as well as shares in commodity companies and exporters.
The Ibovespa fell 17.5% last week after reaching a record 200,000 points following the first round of voting. The real also weakened sharply: the dollar rose 9.18% over the week, its largest weekly gain since 2008. On the Monday after the election, the benchmark stock index dropped more than 13%, prompting B3 to temporarily halt trading, while the dollar advanced 8.41% against the real.
Matheus Spiess, a strategist at Empiricus Research, said companies most exposed to higher interest rates, heavy debt and domestic economic cycles are particularly vulnerable. Exporters may benefit from a weaker real, while companies that pay reliable dividends could offer more stable returns. Spiess also pointed to real assets, such as property and inflation-linked real estate funds, and said investors are looking to increase the international exposure of their portfolios.
Itaú BBA favors infrastructure companies, including utilities and sanitation businesses, whose contracts are adjusted for inflation and whose cash flows tend to be steadier. The bank estimates real returns of 11% to 15% for these companies, and sees dividends as an important source of returns when interest rates are high and share-price gains are limited. It also identifies oil and gas, pulp and paper, capital goods, and materials as export-oriented sectors, while cautioning that overseas exposure does not guarantee gains.
BTG expects Lula’s new term to present challenges, including the need to negotiate with centrist parties to pass measures. The bank forecast that the Ibovespa could fall to 170,000 points in the weeks after the election and that the real could depreciate by 10% to 15%. It named exporters including Gerdau, Suzano, Vale, Prio and WEG, alongside defensive companies with solid balance sheets and net cash, such as Caixa Seguridade, Porto Seguro and Ambev.
Analysts say concern about the government’s fiscal policy is a key source of market pressure. Brazil’s gross debt reached 82.9% of GDP in September, its highest level since 2021, according to figures released by the central bank. Expectations of continued expansionary fiscal policy could raise the risk premium demanded by investors, push up future interest rates and increase borrowing costs for companies and consumers.
Fixed-income investments can attract buyers during periods of volatility, as investors seek comparatively safer and more liquid issuers such as the National Treasury and banks. However, rising rates affect existing and prospective investors differently. Holders of fixed-rate or inflation-linked bonds may face temporary losses if they sell before maturity, while new buyers can lock in higher yields.
Financial planner Aline Dantas said that last week the Treasury’s 2029 fixed-rate bond offered a yield of 14.88% a year, while its 2032 inflation-linked bond paid inflation plus 7.87%. She said investors should match their choice to the time horizon of their goal and consider whether they can hold a bond to maturity. Post-fixed options, such as Treasury Selic bonds and CDBs linked to the CDI benchmark, may suit emergency savings and short-term goals because their prices fluctuate less. Inflation-linked bonds may suit longer-term goals, while fixed-rate bonds require greater caution because their values are more sensitive to shifts in inflation and interest-rate expectations.
Morgan Stanley warned that if the government does not address the debt trajectory, Brazil could face fiscal dominance, in which the cost of financing public debt constrains the central bank’s ability to control inflation through interest rates. In that scenario, the bank projects increases of 3 to 4 percentage points in DI futures rates and long-term fixed-rate bond yields, which could reach 18%. Investors buying at current rates of around 15% could then face losses from mark-to-market adjustments.
For investors seeking dollar exposure, analysts cited by Folha said buying in installments can reduce the risk of investing the full amount at an unfavorable exchange rate. Rebecca Nossig, an equities strategist at Nomad, said gradual purchases and international diversification can help investors avoid concentrating their exposure in Brazilian assets.
Banks see further downside risk for the real. Morgan Stanley expects the dollar to rise first to R$5.50 and then to between R$5.60 and R$5.70 if markets demand a larger premium for fiscal risk; in a more pessimistic scenario, it could approach R$6. JPMorgan forecasts R$5.50 in the coming weeks, while UBS identifies R$5.40 as an initial reference level and says fiscal uncertainty is likely to remain the main source of pressure on the currency.
Sources: Folha Mercado.