A far-reaching corruption scandal dubbed “Lava Jato” (Car Wash) has ensnared a vast swath of Brazil’s political elite — including Temer, who currently holds single-digit approval ratings. The public’s dissatisfaction may create space for outsider and anti-establishment candidates to mount competitive campaigns.

“It is far from clear that a strong, pro-reform candidate capable of building a broad electoral coalition will emerge,” Lamoureux, said.

That means global investors should buckle up for a bumpy ride, Carvalho said. While elections typically bring uncertainty, Brazil’s political instability suggests there’s no shoe-in candidate, and the volatility of public opinion could swing in favor of either a far-leftist or an extreme rightist.

Brazilian markets are likely to be increasingly volatile as the election nears, with the potential for substantial downside. While markets have thus far proven willing to brush off concerns over the country’s political direction, attitudes are likely to shift as the field of candidates comes into focus.

Opinion polls consistently show da Silva, who has been tainted himself by the corruption probe and is now campaigning on an anti-reform platform, currently has the lead. Right-wing populist Jair Bolsonaro is following closely behind.

A big risk to da Silva’s candidacy looms in the form of a Brazilian appeals court, which will decide on Jan. 24 on an appeal by the former president against a corruption conviction that could bar him from running in the 2018 presidential race.

To the extent that this election will determine Brazil’s growth outlook, it will also have ripple effects across the region. Brazil is the region’s largest economy and remains a key trading partner for many of its neighbors. The election of an anti-reform candidate could undermine Brazilian demand for goods from its regional trading partners.

“A recovering economy should help candidates that support broad policy continuity,” Carvalho said. Still, even if market-friendly policies prevail in the end, “the campaign looks set to bring bouts of increased market volatility,” Carvalho said.

—Reuters contributed to this article.