BCA Downgrades Brazilian Stocks and Bonds as Brazil ETF Falls 26%
Key Facts
BCA Research downgraded Brazilian equities, local-currency bonds and sovereign credit to “underweight” in its emerging-market portfolios, a shift covering all three asset classes after Luiz Inácio Lula da Silva won the presidential runoff. Citi analysts said Lula’s victory was likely to be received negatively by markets, citing investor concerns about fiscal policy, state-owned companies and reforms. The reaction was evident in premarket trading on October 26, 2026, when the iShares MSCI Brazil ETF fell 26%. November Brazilian real futures also dropped more than 10%. The moves place BCA’s downgrade in the context of a broader repricing of Brazilian assets after the election result.
The sell-off followed gains in Brazilian assets in the preceding period. Stocks closed on Friday about 7% above their level before the first round of the election. The real was about 5% stronger against the dollar over the same period. The shift highlights a rapid reversal in investor positioning between the first round and premarket trading on October 26. While stocks and the currency gained before the runoff, the ETF and futures moves after Lula’s victory showed sharp pressure on domestic assets. Citi said the concerns behind its negative outlook included fiscal policy, the role of state-owned companies and the reform path.
Fiscal concerns center on the size of the debt and what the next administration will do to rein it in. Lula’s team aims to achieve a primary budget surplus of about 1.3% of gross domestic product by 2030. But public debt exceeded 82% of GDP at the time of the report’s publication in October 2026. A Reuters Breakingviews report said debt had risen by more than 10 percentage points during the previous term, nearing 83% of GDP. These figures set the stated surplus target against a high debt burden that increased during the previous term. They also make the administration’s ability to deliver credible fiscal policy a key focus for investors watching Brazilian markets.
The latest declines do not mean stocks performed poorly throughout Lula’s return to the presidency. The Ibovespa was about 57% above its January 2023 level, when Lula returned to office, according to Reuters Breakingviews. That puts gains since his return against the drop that followed his latest victory, and indicates that the market’s latest move came after a substantial multiyear rally. The makeup of Congress adds a political constraint to the fiscal calculations: right-wing, centrist and right-wing parties hold majorities in both chambers. The report said that majority is likely to constrain spending ambitions, but could also obstruct efforts to raise revenue. The path to fiscal consolidation therefore faces challenges on both spending and revenue approval.
An RBC BlueBay analyst said the main signal markets will watch is the incoming Lula administration’s commitment to fiscal discipline. The analyst added that this signal will begin with the selection of a new finance minister in the coming weeks. The expected timing of the appointment makes it the first step markets can use to gauge the administration’s fiscal direction, amid the stated surplus target and level of public debt. On economic data, the Brazilian Institute of Geography and Statistics set October 30, 2026, as the estimated release date for September data from the Continuous National Household Sample Survey. The release follows the sell-off recorded on October 26, while the selection of a finance minister in the coming weeks remains the awaited event for assessing the signal on fiscal discipline.