South America’s largest economy will hold a two-ballot election next month, which is expected to be a race between far-right candidate Jair Bolsonaro and far-left campaigner Fernando Haddad.
Polls have the two running neck and neck in a second run-off vote, a “devilish” choice that has seen the Brazilian Real plummet.
The election so far has seen countless accusations of corruption, including of Mr Haddad himself, which he denies.
Jon Harrison, managing director of emerging-market macro strategy at TS Lombard said the scandal has potential to “spill-over” to other emerging markets and shock the investors out of their complacency.
He said: “A second-round contest between far-right Bolsonara and far-left Haddad would be a shock to investors, markets would react badly to the prospect that essential fiscal reforms would not be on the agenda of either candidate.
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“In this event, assuming that the candidates do not manage to reassure investors, Brazilian markets could quickly deteriorate to crisis conditions.”
Mr Bolsonaro currently leads in first-round voting according to a poll published Wednesday by the Brazilian Institute of Public Opinion and Statistics (Ibope).
He is estimated to receive around 22 percent of the vote in the first round on October 7, with environmentalist Marina Silva and leftist Ciro Gomes tied in second on 12 percent.
However, this is because jailed Luiz Inacio Lula da Silva has just been declared ineligible to run for office and is likely to be replaced by Mr Haddad, his running partner, in the race to the finish.
Chairman of Eurasia Group Cliff Kupchan said: “Whoever wins will preside over a polarised nation, with almost half the electorate viewing the new president negatively… The near-term outlook for Latin America’s biggest economy isn’t great.”
Emerging markets in general have been struggling recently, with MSCI emerging markets stock index down 12 percent since the start of the year.
In the last week, there have been fears about Argentina’s and Turkey’s economies, resulting in a fall of 4.1 percent fall between Thursday and Tuesday and a further 1.4 percent drop yesterday.
Argentina’s economy has been mired by rampant inflation and Turkey”s economic troubles stem from rates being kept too low due to pressure from President Recep Tayyip Edogan.
Mr Harrison said: “The evident difficulties that have hit Turkey and Argentina this year have so far been viewed by markets as largely confined to those two countries – with limited spill-over to other emerging markets.
“What has changed is Brazil. The likelihood of a market friendly outcome in the Brazilian election first-round has receded (and that) has the potential to shock markets out of their complacency.”