Monetary easing cycle expected to trigger Ibovespa rally

Historical data suggest the Ibovespa often experiences two upward movements during Brazil’s monetary easing cycles. The first, less pronounced, tends to occur before rate cuts begin, when markets are still gauging the scale of the cycle. The second, stronger surge typically happens well after the easing starts. The findings come from a Santander study commissioned by Valor, which examined 11 easing cycles in Brazil since 1999.

The bank noted that public services stocks—such as power and sanitation companies—listed in B3’s utilities index tend to post the biggest returns in the 12 months before a cycle starts, with gains averaging 35%. However, these stocks usually regain momentum only between 12 and 24 months after cuts begin. Real estate stocks, also tracked on B3, have shown even stronger performance one year into easing, with average returns of 51% over that period.

The expected cycle beginning in 2026 will mark the first time a rate-cutting process coincides with an election year. That could bring more volatility and affect returns, especially given the high Selic level of 15%.

“The Ibovespa does have a second leg up when rate cuts are prolonged,” said Ricardo Peretti, equity strategist at Santander Corretora.

The last time rates were at similar levels was in 2016, when they reached 14.25% a year. The BC began cutting in October that year, and the Ibovespa gained 20.0% in the six months before easing began, Mr. Peretti recalled. In the following six months, the increase was only 1.3%. But between 24 and 36 months after the 2016 cuts began, the index rose 21.2% and 35.6%, respectively—suggesting stronger long-term gains.

Median Ibovespa returns since 1999 show a 25% gain in the 12 months before a cycle, but a 6.4% drop in the six months before cuts begin. Three months ahead of easing, returns improve, turning positive at 9.3%. Performance 12 and 24 months after the start of a cycle shows gains of 12.3% and 29.4%, respectively.

“There’s always the perception that the market anticipates rate cuts—and it does. But there’s also a second leg if the Copom’s rate-cutting process is prolonged,” said Mr. Peretti.

With signs of slowing activity confirmed by July’s IPCA inflation reading coming in below median forecasts, asset managers point out how a restrictive monetary policy is weighing on the real economy. Many see now as the time to position in stocks likely to benefit from falling rates.

“We’re seeing a slowdown, especially in domestic retail and consumption. The impact of high Selic for a prolonged period is hitting consumers’ pockets,” said Christian Keleti, CEO of equity manager Alpha Key. “There’s a meaningful chance COPOM will cut by 300 basis points [3 percentage points] or more next year, given the scenario we’re seeing.”

Mr. Keleti said Alpha Key is starting to boost exposure to domestic sectors, but is focusing on companies that are neither stressed nor heavily leveraged, as this is not the time to take on such risks. Two key holdings are Assaí and C&A, which have been posting solid results for several quarters.

“Assaí is cutting investments to improve efficiency, reduce leverage, and fine-tune operations, aiming to boost sales when the market improves. C&A, the best ‘fast fashion’ company in the past two years, should benefit from potential rate cuts, as it’s managing risks well and could be more confident in boosting card sales,” Mr. Keleti said.

While consumer stocks in B3’s sector index posted returns of 7.8% in the 12 months before rate cuts, Santander’s study shows the sector delivered much stronger gains—39.0%—a year after easing began.

Another standout is smaller-cap companies. Santander found that since 1999, the highest small-cap index returns came between six and 12 months after cuts began, with median gains of 25.6% and 27.1%, respectively.

Among small caps, Brisanet, Intelbras, and Priner are key bets for Leblon Equities to ride the Selic downtrend. Leblon founding partner Pedro Rudge said falling rates tend to increase risk appetite and benefit companies with more limited access to credit, such as small caps.

Leblon is also assessing potential asymmetries in a scenario of possible political change in 2026. Recently, it added long positions in Petrobras and Banco do Brasil. “Looking at current prices, we don’t think the market is adequately pricing in a possible change of government in 2026,” Mr. Rudge said.

Although the short term could bring concerns about farm loan defaults at Banco do Brasil and higher Petrobras investment spending, Rudge sees a safety margin. “There’s cushion to work with, even under those assumptions. Combined, the positions should represent about 4% of the portfolio,” he said, adding that Leblon has a three-to-five-year investment horizon and avoids placing disproportionate weight on short-term views.

A Bank of America survey of 31 Latin American asset managers, with about $110 billion under management, showed a shift in expectations for when investors will start trading with an election focus.

In July, 57% of managers expected “electoral trade” moves to start in the last quarter of this year or earlier. This month, only 22% said those moves would begin by year-end, with most now betting on the first and second quarters of next year.

Michel Frankfurt, head of Scotiabank’s brokerage in Brazil, noted that elections traditionally had less impact on Brazilian assets, but that changed with the sharper polarization of recent races.