Brazil fund EWZ drops 27% after elections

iShares MSCI Brazil ETF (EWZ) faced a sharp sell-off following the Brazilian presidential elections, plunging 26.91% to the $31.13 level. President Luiz Inacio Lula da Silva clinching victory in the 2nd round of voting held on Sunday led to a reversal of pre-election pricing in the markets. Lula, who will turn 81 on Tuesday, entered his 4th presidential term in the country with this result.

Why did 'Bolsonaro Pricing' in the markets collapse?

Ahead of the election process, markets were heavily pricing in a victory for Senator Flavio Bolsonaro, the right-wing candidate and eldest son of former President Jair Bolsonaro. Bolsonaro, who finished ahead in the 1st round of voting 3 weeks ago, was also leading the 2nd round in public opinion polls. In prediction markets, the probability of Bolsonaro winning had climbed as high as 83%. Refusing to concede defeat after the election results, Bolsonaro cited a decision by a Supreme Court justice appointed by Lula that extended voting hours across the country by 2 hours.

How did Lula's victory affect Brazilian funds?

As part of the 'Bolsonaro Pricing' in which investors had taken positions since mid-August and which gained momentum in early October, investors had bought into fiscal discipline, corporate tax reform, and potential privatization programs. In addition, the strengthening of the Brazilian real, which was expected to lower consumer price inflation (CPI), ease the debt burden, and support foreign capital inflows, had also supported fund returns. With Lula's victory, the dashing of these expectations created severe selling pressure in the markets.

This content is for information purposes only and does not constitute investment advice.