Why Shares of Banco Santander Brasil, Banco Bradesco, and Itau Unibanco Holding Are Rising Today

What happened

Shares of several Brazilian banks (and Brazilian stocks in general) rose today after results for the first round of the country's presidential election were reported.

Shares of Banco Santander Brasil (BSBR 2.12%) were up roughly 9.2% as of 2:01 p.m. ET. Banco Bradesco (BBD 0.76%) climbed 10.2%, and Itau Unibanco Holding (ITUB 2.46%) traded nearly 10% higher as well.

So what

In the first round of the election, former President Luiz Inacio Lula da Silva won more votes but did not capture the 50% threshold needed to secure victory outright, sending the vote to a run-off later this month. Incumbent President Jair Bolsonaro garnered 43% of the vote, while Silva claimed 48%.

Still, Bolsonaro did better than expected, and many of his political allies did well in the congressional elections, which may stymie any of Silva's efforts for radical policy changes if he does end up winning the run-off.

Investors seemed to think the results will push Silva toward less radical policies, while also fueling Bolsonaro, who is pledging reforms and the privatization of big state-owned companies like Petrobras.

"I think people will see reforms as more probable," said Ricardo Lacerda, founder and CEO of the investment bank BR Advisory Partners.

RB Investimentos strategist Gustavo Cruz agreed, stating, "Whoever is the winner, he will not have a blank check from the electorate."

Regardless of the election, the outlook for Brazil's economy has improved a lot lately. At the beginning of the year, most economists weren't projecting a lot of economic growth.

Now, economists believe that 3% gross domestic product growth is attainable. Unemployment has dropped to 9% from 12% and inflation is on the decline, as Brazil's central bank moved early and ahead of other foreign central banks.

"The first releases for July suggest that industry, services, and the labor market continue to grow. The confidence series confirm the positive expectations for the third quarter, with widespread expansion in the various sectors," the Brazilian Ministry's Secretariat for Economic Policy said a few weeks ago, after revising GDP expectations higher.

Now what

It is certainly not uncommon for markets to gain in times of political gridlock because it can make big policy changes harder to pass, which seems to be the case for Brazilian stocks today.

But the political situation in Brazil is still tense right now, with Bolsonaro having said prior to the election that he may not accept the results, claiming the polls and vote tallies are rigged against him.

This has led some to believe that a political coup could occur if Bolsonaro doesn't win, which is still looking like a more realistic outcome based on the first round of election results, although many are not sure that Bolsonaro has the support to pull off a coup.

As some of the largest banks in Brazil, Banco Santander Brasil, Banco Bradesco, and Itau Unibanco Holding will all benefit from more economic growth. If the country can get through these elections peacefully, I do think these three stocks could have more room to run.