Investors blindsided by President Luiz Inácio Lula da Silva's re-election are balking at buying into Brazil's markets after bullish bets on the nation's assets unraveled spectacularly. Citigroup Inc., Morgan Stanley and other big banks, which had advised loading up on Brazil before the vote, rushed to recommend clients pare back on what had been one of this year's favored emerging-market trades amid Monday's selloff.
Wall Street had piled into Brazil after right-wing challenger Flávio Bolsonaro emerged from the first round in early October with a lead, unleashing a powerful rally that drew billions in foreign cash. Investors wagered that a change in government would usher in policies to tackle the nation's massive budget deficits. Instead, assets across Latin America's biggest economy cratered on Monday. The real dropped 8%, the most in more than two decades, and the benchmark Ibovespa index of stocks plunged roughly 14%, the most since early 2020.
At Aberdeen, the decision is to stand pat for now, pending signals from Lula's administration on his economic team and fiscal plans. "We won't see many elections like that in a lifetime," said Kieran Curtis, the firm's head of emerging-market local currency debt. There are signs of tentative stability, particularly in the real, which has rebounded in both sessions after the Monday rout.
Brazil faces severe fiscal strains, with household delinquencies and corporate defaults at record highs, and a budget gap exceeding 9% of the economy. Lula's administration is seen as more inclined to maintain social benefits and boost consumption through credit. "Markets will put Lula against the wall and force him to decide what he is going to do," said Daniel Utsch, a portfolio manager at Nero Capital in Sao Paulo.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing