Brazilian President Lula won re-election; Brazil-themed ETFs plunged sharply—ChinaAMC’s Brazil ETF and E Fund’s Brazil ETF hit the daily trading limit down. How should we interpret this?

On October 5—the first trading day after Flávio Bolsonaro, son of former President Jair Bolsonaro, led in the first round of voting—the Brazilian real appreciated approximately 4.3% against the U.S. dollar, reaching about BRL 5 per USD. On October 23—the last trading day before the runoff vote—the real rose another ~0.98%, closing at approximately BRL 4.9896 per USD. According to CNN Brasil’s analysis, investors had previously associated an opposition victory with stronger fiscal discipline, debt control, and lower interest rates. The policy expectations tied to the right-wing camp clearly prompted capital markets to turn bullish on Brazilian assets. Yet ultimately, the left-wing candidate Lula won. His policy platform stands in stark contrast to the right’s: emphasizing continued real growth in the minimum wage, expanded education subsidies, relief for household and small-business debt burdens, and sustained public investment. However, Brazil’s public finances are already under severe strain—public debt-to-GDP has exceeded 82%. Further expansion of government spending thus raises market concerns over runaway fiscal deficits. Moreover, when interpreting this event, we must also consider the composition of the Brazil index: This index covers several key sectors where Brazil holds global competitive advantages—including Vale, one of the world’s largest iron ore producers, and Petrobras, the state-owned energy giant. Financials also carry high weight, featuring major institutions such as Banco do Brasil and Bradesco. Other constituents include Ambev, Latin America’s beverage giant; WEG SA, a motor industry leader; and Eletrobras, Brazil’s state-controlled power utility.

The Brazilian stock market collapsed—plunging 13.88% overnight!

The immediate trigger was President Lula’s re-election victory. Why would the Brazilian president’s re-election spark such panic in the market? That seems counterintuitive... In fact, ahead of the election, financial markets had bet heavily on the other candidate—the right-wing Flávio Bolsonaro. Polls and first-round voting results both showed Flávio Bolsonaro maintaining a lead. Flávio Bolsonaro is the eldest son of Jair Messias Bolsonaro, who served as Brazil’s president from 2019 to 2022. Jair Bolsonaro—known for his political style resembling Donald Trump’s—was dubbed the “Trump of Brazil”: far-right, outspoken, highly performative, and immensely popular. However, he is currently under house arrest after being sentenced by Brazil’s Supreme Court to 27 years and 3 months in prison for allegedly orchestrating a coup following his 2022 electoral defeat. Unable to run himself but still commanding strong popularity, the far-right coalition nominated his son Flávio to challenge Lula for the presidency. In the first-round vote, Flávio secured 47.03% of the vote—edging out incumbent President Lula’s 45.16%. The remaining candidates collectively garnered roughly 7.81%, with each receiving less than 3%. Under Brazil’s electoral rules, if no candidate wins over 50% in the first round, the top two automatically advance to a runoff—and the winner becomes the next president. Historically, since direct presidential elections were restored in Brazil, no candidate who placed second in the first round has ever gone on to win the presidency. Thus, Flávio Bolsonaro’s chances of victory appeared extremely high. Markets naturally bet on Flávio—fully expecting that his administration would usher in a new wave of investment opportunities for Brazil. Indeed, buoyed by this expectation, Brazil’s Bovespa stock index rose 23% year-to-date. So why were markets so eager for Flávio Bolsonaro’s victory? Isn’t Lula’s presidency preferable? Let’s compare GDP growth during their respective presidencies. Jair Bolsonaro (2019–2022): Brazil’s annual GDP growth stood at +1.4%, −3.9%, +4.6%, and +2.9%—averaging 1.25% over four years. Lula has served three non-consecutive terms: his first two ran from 2003 to 2010—a golden era for Brazil’s economy—with average annual GDP growth around 4.0%–4.3%. His current third term (2023–2026) shows GDP growth of +2.9%, +3.4%, +2.3%, and +2.0% (forecast), averaging 2.65% over four years. By any measure, Lula’s track record looks stronger—so why do capital markets favor Bolsonaro? ………… Markets’ aversion to Lula stems from three underlying reasons: First, Brazil’s public finances face unprecedented strain—and much of this stems directly from Lula’s earlier administrations.

Petrobras, Braskem plunge after Lula's election upset in Brazil

1 day ago

Shares of Petrobras and Braskem plummeted following Luiz Inacio Lula da Silva's unexpected election victory in Brazil. Petrobras fell 17.8% while Braskem dropped 38.8% as investors reacted to the political shift.

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