Itaú BBA has reinforced its buy recommendation for Brazilian equities following a surge in the

Itaú BBA has reinforced its buy recommendation for Brazilian equities following a surge in the Ibovespa index on October 5, which rose 7.7% in reais. The shift follows first-round election results where Senator Flávio Bolsonaro (PL) led President Luiz Inácio Lula da Silva (PT) with 47.03% of the vote compared to 45.16%.

Market professionals view a reversal in the second round, scheduled for October 25, as unlikely. According to the bank’s analysis, Flávio Bolsonaro is perceived as more likely to prioritize public account adjustments, whereas Lula faces distrust from a significant portion of the market.

Ibovespa targets 246,000 points under fiscal reform

Itaú BBA strategists state that current market pricing is compatible with a gradual fiscal adjustment scenario. At the close of October 5, the Ibovespa stood at 206,000 points with NTN-B real interest rates at 6.5%.

The bank’s sensitivity analysis suggests the index could reach 246,000 points if deeper fiscal reforms are implemented. This would move the price-to-earnings (P/E) valuation to approximately 11.5 times, up from the current 9.6 times.

Strategists modeled four fiscal scenarios: maintenance of current spending trends, the current framework, “reformas 2” and “reformas 1.” These scenarios imply real interest rates ranging from 8.5% in the most negative case to 5% in the most positive, compared to the current 6.5%/7% range.

Under these conditions, the P/E multiple could vary between 7.3 and 11.5 times. For context, the Ibovespa’s historical P/E ranged from 6.5 times in 2022 to 14 times between 2019 and 2020, before the pandemic.

Domestic sectors drive October 5 rally

The financial sector accounted for 48.1% of the points gained by the Ibovespa on October 5. Utilities contributed 20% and energy 13.8%, with the total of 82% of the positive contribution of the index.

The top contributing stocks were Itaú PN (ITUB4), B3 ON (B3SA3), Petrobras PN (PETR4), BTG Pactual PN (BPAC11), and Bradesco PN (BBDC4), which responded for 46% of the points gained of the index.

Conversely, the basic materials sector was the only one with negative impact. Companies linked to iron ore, cellulose, and steel—including Vale ON (VALE3), Embraer ON (EMBJ3), Suzano ON (SUZB3), and Gerdau PN (GGBR4)—indicated a rotation of investors to domestic sectors.

Itaú BBA identifies undervalued equities

Despite the October rally, Itaú BBA identifies several companies with solid fundamentals and attractive valuations that are still with accumulated performance for the year below the Ibovespa and may have room for recovery. The bank highlights the following as atrasadas stocks:

• Equatorial (EQTL3)
• Rede D’Or (RDOR3)
• Localiza (RENT3)
• Sabesp (SBSP3)

The bank prefers a strategy balanced between dividend theses, bond proxies, quality domestic companies, and firms with dollar revenues. Infrastructure and utilities are highlighted as main choices within the strategy of bond proxies, with combination of quality assets with real internal rates of return between 10% and 12%.

Other preferred sectors include shopping centers, which possess the highest sensitivity to the drop in interest rates. In the group of quality cyclical companies, it highlights financial institutions and the real estate sector. The health sector continues attractive due to reinvestment opportunities.

Fixed income leads market pricing shift

Itaú BBA notes that fixed income was the market that most quickly passed to reflect an improved scenario. The indicator that tracks the 10-year real interest rate differential between Brazil and the U.S. advanced to 73.6%, from 20% to 40% in 2025.

Equities only passed lightly to the positive terrain, with the indicator reaching 52.6%, suggesting a still moderate change in market perception. Exchange rates remained close to neutrality, with the real more influenced by external factors, such as interest rate differential, commodities, and global liquidity.

Potential for R$ 270.2 billion in capital inflows

In a sensitivity exercise, Itaú BBA assumed that foreign and local investors return to their historical allocation averages, and the potential for entry of resources for the Brazilian stock exchange would be of R$ 270.2 billion. This total would consist of 45% coming from foreigners and 55% from locals.

The bank calculates that each 1 percentage point increase in Brazil’s participation in the MSCI Emerging Markets index could generate R$ 79.3 billion in entries. A return to the historical average weight of 5.6%, ante 4% currently, would represent R$ 123 billion.

Among local investors, each 1 percentage point increase in equity allocation would represent an additional R$ 113.2 billion. Currently, equity funds represent 7.6% of the total industry assets.