The fund drew $1.66 billion in the week ending Oct. 16 alone, as investors piled into Brazilian stocks following Bolsonaro’s narrow lead in the first round of voting on Oct. 4. EWZ surged 12.5% the following day, its biggest jump since March 2020.
Lula ultimately prevailed with 51.8% of the runoff vote, compared with Bolsonaro’s 48.2%. EWZ closed down 19.8% on Oct. 26, its second-worst decline since the fund launched in 2000. In intra-day trading, it was down as much as 26%.
The results again showed the limits of crowd forecasts. According to The Rio Times, Bolsonaro led Lula in 39 of 45 national runoff polls, while prediction market Kalshi gave him a more than 80% chance of winning just one day before the vote.
The surprise outcome triggered a broad selloff. The country’s benchmark Bovespa index plunged 13.9%, while the Brazilian real fell more than 11% against the U.S. dollar, its steepest intraday decline in more than two decades. Government bonds also faced heavy selling pressure, prompting Brazil’s Treasury to cancel scheduled bond auctions.
The selloff reflected concerns about Brazil’s fiscal outlook under Lula’s fourth term. Mauricio Monge, a Latin America economist at Oxford Economics, wrote in a report that Lula’s biggest challenge will be convincing investors “he can deliver a credible, sustainable fiscal adjustment while prioritizing real wage growth and employment.”
Risky bets on candidates
Brazil’s market reaction highlights the risks of making bets based on a particular election outcome. History also shows that the initial market reaction to an election doesn’t always last.
When Donald Trump unexpectedly won the 2016 U.S. presidential election, S&P 500 futures plunged 5% overnight, triggering trading limits. However, by the following afternoon, markets had recovered sharply, with the S&P 500 rallying 1.1% and the Dow Jones Industrial Average gaining 1.4% as investors considered the potential benefits of tax cuts, deregulation and infrastructure spending.
Brazil experienced something similar when Lula first won the presidency in 2002. As the International Monetary Fund reported, fears about his economic policies contributed to capital outflows and a 60% decline in the real between April and October that year. But financial markets eventually improved as Lula pursued more conventional economic policies and the Brazilian economy performed better than expected.
And Brazil markets on Oct. 27 recovered a bit from the previous day, with the real rising around 2% against the dollar and the benchmark index up around 1%. EWZ ended the day up 0.44%.
