By Brazil Stock Guide – Morgan Stanley expects Brazil’s benchmark Ibovespa index to reach 240,000 points in its base-case scenario for the next 12 months, implying a return of about 31% in reais and 22% in dollars, according to a report cited by InfoMoney.
The US bank kept Brazil at overweight within Latin America, while warning that the short-term outlook “requires caution.” Strategists cited the risk that oil prices remain higher for longer, which could delay the easing of financial conditions and weigh on economic growth.
Morgan Stanley said Brazil remains well placed to absorb new investment flows tied to energy, commodities and infrastructure for artificial intelligence. The bank also highlighted the country as one of its preferred markets in Latin America for AI-related infrastructure spending.
Energy remains a key part of the bank’s Brazil thesis. Against the backdrop of tensions in the Middle East and their potential effect on oil prices, Morgan Stanley increased its position in Petrobras (PETR3, PETR4) and Copel (CPLE3).
“An ongoing monetary easing cycle will reduce capital costs and risk premiums,” the strategists wrote, according to InfoMoney.
The bank expects a slowdown in Brazil’s economy to allow lower interest rates, provided it is accompanied by a credible fiscal adjustment path. That combination, according to Morgan Stanley, could support a new investment cycle, strengthen private credit and improve the quality of economic growth.
Lower equity capital costs could also help expand market multiples. In its base case, Morgan Stanley sees room for a positive rerating toward about 10 times price-to-earnings.
The bank still flagged risks from energy-driven inflation, which could keep rates high for longer, especially if it leads to weaker growth or recessionary conditions.
“The materialization of this scenario would lead us to adopt a more bearish view, although the risk remains low, since our economists also interpreted the recent Copom meeting as dovish, despite renewed pressure from the conflict in the Middle East,” the report said.
Morgan Stanley also pointed to a paradox in Brazilian positioning. Emerging-market managers are already heavily allocated to Brazil by historical standards, while local investors remain underallocated to domestic equities.
The bank said Brazil could still benefit from additional global capital moving into emerging markets. If global investors adopted a 1% allocation to emerging markets, Brazil could receive about $30 billion in inflows, according to the report.
The more distinctive opportunity, however, may come from domestic investors. Brazil’s capital markets have surpassed $2 trillion, while local participation in domestic equities is near 4%, compared with a historical average close to 9%.
Morgan Stanley expects lower interest rates to encourage renewed flows into equities. The bank estimates that local equity fund assets under management could increase by as much as $25 billion solely because of changes in the Selic benchmark rate.
The bank previously estimated that each 50-basis-point cut in the Selic would correspond to roughly $2 billion in domestic reallocation flows. Its economists currently project 450 basis points in cuts by the end of 2027, with the Selic at 13% at the end of 2026 and 10.5% at the end of 2027. Based on current local fund assets under management, that would imply about $23 billion in inflows.
If local capital returns to Brazilian equities, Morgan Stanley said it prefers the Ibovespa over MSCI Brazil, which is more heavily owned by foreign investors. The bank stressed that this does not amount to a preference for small-cap stocks, since about 90% of the Ibovespa is made up of shares also included in MSCI Brazil.
Among overweight-rated stocks that could receive the largest inflows relative to liquidity within the Ibovespa, Morgan Stanley cited Equatorial (EQTL3), Axia Energia (AXIA3) and Vibra Energia (VBBR3).
The 2026 presidential election also figures in the bank’s scenario analysis. While Morgan Stanley said it is still too early to have confidence in the outcome, it outlined two groups of stocks for investors to consider depending on the policy path.
In a scenario of policy change and a structural transition from consumption to investment, the bank highlighted rate-sensitive, high-quality financial services names such as Nubank (ROXO34), XP (XPBR31), BTG Pactual (BPAC11) and B3 (B3SA3). It also cited selected consumer and real estate names including MercadoLibre (MELI34), Cyrela (CYRE3) and Vivara (VIVA3), as well as state-controlled companies such as Petrobras (PETR3, PETR4) and Banco do Brasil (BBAS3), and investment-linked names including Axia Energia (AXIA3), Rumo (RAIL3) and Motiva (MOTV3).
In a policy-continuity scenario, in which Brazil’s economic model remains driven by fiscal stimulus, Morgan Stanley pointed to companies with hard-currency revenue, including Vale (VALE3), Embraer (EMBJ3), Gerdau (GGBR4), JBS (JBSS3) and Suzano (SUZB3). It also cited financial companies that benefit from higher rates, such as Itaú Unibanco (ITUB4), BB Seguridade (BBSE3), Caixa Seguridade (CXSE3) and Porto (PSSA3), as well as defensive telecom names including TIM (TIMS3) and Telefônica Brasil (VIVT3).
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