Despite a 12% increase in the first half of the year, institutional investors remain optimistic about the Ibovespa index’s upside potential.
According to a recent XP analysis, a mix of global and domestic variables is supporting this bullish forecast.
A crucial driver is the continuous migration of foreign money from the United States to other markets, especially Brazil.
The investment rotation is expected to continue, especially while political and macroeconomic instability in the United States lingers.
The weakening of the US currency, which fell by almost 12% in the first half of 2025, also helped to bolster Brazilian and other Latin American markets.
The dollar’s unexpected slide, while startling in scale, was consistent with previous projections that volatility under the Trump administration would help developing market assets.
Lower rates and inflation improve local outlook
XP cites three key reasons why the firm remains optimistic about Brazilian equities in the future: rotation to the rest of the world, which is likely to extend beyond US stocks, falling inflation and interest rates, and the electoral trade, which is a common occurrence before national elections.
All of these factors point to a more bullish outlook for equities later this year.
Historically, as the country transitions into a lower interest rate regime, particularly given the tailing off of inflation, this has been a bullish medium to long-term backdrop for stocks.
That, combined, should make Brazilian assets more attractive, especially to institutional investors looking for yield outside the US.
US trade policy drives regional rebound
The decline in Brazilian asset prices at the end of 2024, which was fueled in part by US trade policy, laid the groundwork for the present recovery.
The implementation of tariffs by President Trump has increased capital outflows from the United States, driving funds to emerging nations like Brazil.
With robust liquidity and a cyclical character, the country has been an obvious beneficiary of this shift.
Institutional voices, including managers from ARX Investimentos and Genoa Capital, concur that last year’s weakness paved the way for the current recovery.
The combination of external shocks and the dollar’s fall sparked increased interest in Latin American equities.
Electoral trade and asset rebalancing in focus
Also, market dynamics are affected by Brazilian politics. The second half of an election year has historically seen equity revaluation as investors take new positions in anticipation of policy changes.
XP analysts say the market generally starts factoring in electoral scenarios between 6 to 12 months before the election.
With tightening valuations caused by recent appreciation, managers still view opportunity as contingent on the dollar staying weak and commodity prices retaining their current levels.
One example: Genoa Capital exited Brazil altogether in late 2024, but over the past year or so has been rebuilding its exposure.
Almost half its portfolio is once more linked back to Brazilian assets, a testament to the market’s recovery.
Although American firms remain robust despite the challenges, especially within cyberspace, such as generative AI, Genoa and others now see Brazil as an ever more appealing addition.
Macro conditions have changed, and political narratives have heated up, but now the stage is set to see institutional investors double down on the Brazilian market in the coming months.
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