Last dance? Inside Lula’s strategy to win a fourth presidency in Brazil

Brazil’s October 4 presidential election is highly competitive, with Datafolha showing President Luiz Inácio Lula da Silva at 46% versus Senator Flavio Bolsonaro’s 43% in a potential runoff. Lula enters the race with GDP growth averaging just under 3% during his term and record-low 5.1% unemployment at end-2025, but voter sentiment remains strained by high borrowing costs, rising debt and affordability pressures. The government’s costly credit, tax-exemption, subsidy and debt-forgiveness measures, alongside renewed 25% US tariffs on selected Brazilian products, could shape both the election outcome and Brazil’s fiscal, trade and market outlook.

Analysis

Brazilian assets are likely to trade the election primarily as a fiscal-risk and real-rate referendum, not an ideological event. A Lula victory would raise the probability of further quasi-fiscal credit programs, administered-price interventions and a slower primary-balance repair path; that combination is negative for BRL duration and domestic multiple expansion even if near-term consumption remains supported. The most exposed liquid proxies are EWZ, BRL/USD, Brazilian local-rate ETFs/forwards, and state-influenced Petrobras (PBR), where fuel-price policy risk can re-emerge faster than it affects reported earnings.

A Bolsonaro victory is not mechanically asset-positive. Markets may initially price lower intervention risk and a better chance of trade normalization with Washington, benefiting EWZ, Itaú (ITUB), Banco Bradesco (BBD) and PBR; however, a narrow result could revive institutional-risk premia, complicate congressional coalition building and widen sovereign spreads. The decisive variable over the next 1-3 months is whether either campaign produces a credible financing plan: unfunded affordability measures would pressure the BRL, force higher-for-longer Banco Central policy expectations, and impair rate-sensitive retailers and homebuilders despite headline growth resilience.

The consensus risk is treating a close poll as a binary election bet. High rejection rates make turnout and late undecided-voter migration unusually important, while a runoff extends volatility rather than resolving it. For 6-18 months, Brazil's strongest structural beneficiaries are exporters with dollar revenue—Vale (VALE), Suzano (SUZ), and protein exporters such as JBS—if fiscal uncertainty weakens BRL; domestic cyclicals need evidence of falling inflation expectations and a declining term premium before becoming durable longs.

Key Decisions for Investors

• Maintain a tactical long USD/BRL hedge into the first-round and runoff windows; size modestly because a market-friendly surprise could produce a sharp BRL rally. Thesis is falsified by sustained improvement in inflation expectations and a credible, funded fiscal framework from the leading candidate.
• Pair long VALE or SUZ against short EWZ for the next 1-3 months if polls remain within the margin of error: dollar earners hedge BRL/fiscal stress while EWZ retains concentrated exposure to banks, domestic cyclicals and policy-sensitive state enterprises.
• Avoid adding to PBR ahead of a clear post-election policy signal; use any election-driven rally to reduce exposure unless management reaffirms market-based fuel pricing and capex discipline. The upside from lower political-risk premium is asymmetric only if those commitments are independently verifiable.
• Watch Brazil 5-10 year local-rate curves and CDS rather than headline polls. A sustained widening in term premium or CDS after a candidate's fiscal proposal would justify underweighting ITUB, BBD, Lojas Renner (LREN3) and other domestic-duration equities; tightening would be the trigger to reverse that positioning.