By Vinícius Andrade and Giovanna Bellotti Azevedo Investors are betting Brazil’s election-fueled rally has just begun — a wager that ultimately hinges on a fiscal overhaul markets have long demanded, but still know little about.

Brazilian markets had one of their best days in years Monday after challenger Flávio Bolsonaro turned in a surprisingly strong showing against President Luiz Inácio Lula da Silva, fueling bets that the right-wing candidate will unseat the incumbent in a runoff later this month.

Brazil watchers expect the nation will have a better chance of tackling its ballooning deficit under the eldest son of former President Jair Bolsonaro, even though he has yet to put forth a detailed plan on how to do so. Still, that hope, combined with voters’ disenchantment with Lula that also fueled a right-wing sweep in congressional elections, is enough for firms from Pacific Investment Management Co. and UBS Group AG’s asset-management unit to Citigroup Inc. and Morgan Stanley to say Brazilian assets should continue to rally.

“Markets will probably give him the benefit of the doubt for now, but ultimately he will have to deliver on the fiscal front for the rally to be sustained,” said Anthony Kettle, a senior emerging-markets portfolio manager at RBC BlueBay.

Gains extended on Tuesday, with the currency climbing alongside emerging-market peers and swap rates falling further as markets adjusted to the expectation of lower interest rates ahead. The iShares MSCI Brazil ETF, the biggest exchange-traded fund tracking the nation’s equities, was up 0.5% in New York after seeing record volumes and inflows in the previous session.

Brazil is the latest test of a political shift that has seen voters across the region turn away from the left, ushering in governments seen as geared toward more market-friendly policies. Over the past year alone, right-leaning candidates, many with the backing of US President Donald Trump, have scored election victories in Bolivia, Chile, Colombia and Peru.

That move has added to Latin America’s appeal among investors, who also point to its abundant natural resources and relative distance from major geopolitical conflicts.

But the country remains mired in fiscal problems. The budget deficit has swelled to nearly 10% of gross domestic product, while public debt has climbed above 80% of GDP. The mounting debt pile forces the central bank to keep interest rates at double-digit levels, analysts say, limiting economic growth and keeping families and companies in a chokehold.

Bolsonaro has pledged to rein in spending, reduce bureaucracy and cut taxes, with top economic adviser Daniella Marques drawing inspiration from Javier Milei’s “chainsaw” agenda in Argentina, but offered few specifics on how he’ll do so. Still, investors see him as a step up from the status quo, and more likely to enact meaningful changes.

After a recent visit to Brazil, TCW Group Inc. came away with the view that his campaign is committed to pursuing real fiscal reform, said Latin America sovereign analyst Ayoti Mittra.

“It’s a game-changer for how you should think about Brazilian politics,” said Alexander Robey, a portfolio manager at Allianz Global Investors. “The timing and momentum are on Flavio’s side.”Investors see room for gains across asset classes. JPMorgan Asset Management’s Howard Sheers said the Brazilian real could benefit from equity inflows and already-strong terms of trade, while RBC BlueBay thinks the rally in local debt also has further to go.

At UBS Asset Management, Shamaila Khan says assets could keep gaining as markets price in greater fiscal discipline and increased belief that needed reforms will start to happen.

There are plenty of hurdles to the bullish case. Bolsonaro still needs to turn his strong first-round performance into a runoff victory on Oct. 25, with investors on guard for signs that Lula can claw back support as votes from eliminated candidates are redistributed.

And even if Bolsonaro wins, the market honeymoon may be short-lived. VanEck’s Natalia Gurushina says investors will quickly shift their focus from campaign promises to evidence of credible fiscal targets and concrete progress on reforms, which requires legislative support. “For Brazil, the clock starts now,” she said.

The results of Sunday’s general election offer some relief for investors even if the presidential race goes the other way. A more right-leaning Congress, where voters elected a wave of Bolsonaro allies, could help him push through an ambitious agenda if elected — or constrain Lula’s ability to enact fiscally costly measures if he manages to turn the race around.

“A more conservative Congress raises the odds of credible fiscal consolidation over the coming years and meaningfully reduces the left-tail risk of persistently loose fiscal policy, regardless of who wins in the second round,” said Pramol Dhawan, head of emerging markets at Pimco. “We’re constructive on Brazil from here.”