Gustavo Neffa
Partner & Director at Research for Traders, Economist & Professor
Lula's fourth mandate has dealt Brazilian equities a political shock, with a risk of deeper losses after the initial selloff. EWZ fell about 18% overnight and 27% by morning; the intraday recovery does not settle what comes next, given the much deeper falls after Argentina's 2019 primary-election shock. x.com x.com x.comÂ
Brazilian equities are cheap and the market is pricing a 180-degree turn in fiscal and economic policy after the election's first round. Many eliminated candidates' voters would likely lean toward Bolsonaro over Lula, though everything is decided in the runoff. Brazil pays good dividends, trades at low multiples and benefits from soaring commodities other than precious metals. An intraday pullback is needed, with more upside if the political change is confirmed. x.com x.comÂ
Brazilian equities look uninvestable as the political shift toward socialism threatens to make an already poor inflation-adjusted long-term bet worse. The Brazil ETF's sharp decline after the political outcome illustrates the concern, though individual winners remain possible. x.com x.com x.comÂ
Socialist politics are a poor backdrop for Brazilian equities. A 23% drop in EWZ is not a compelling long case when it merely returns prices to where they stood before the first election. x.comÂ
Political fear after Lula election wins is a buying opportunity in Brazilian stocks, including EWZ, MercadoLibre and Nu Holdings. In USD, the table shows 12-month gains of 115% after 2002, 76% after 2006 and 18.5% after 2022, though shorter-term returns varied. x.comÂ
Crowded Brazil and EWZ longs are exposed after Lula's surprise election win, as reported by negligible_cap. MercadoLibre and many others are going to get absolutely nuked tomorrow. x.comÂ
Brazilian equities could take months to absorb exits by funds unwilling to hold stocks under Lula, despite single-digit P/Es. The Bovespa looks to be putting in a 3.5-year cycle peak, and EWZ looks lower over the next few weeks or months. After a failed breakout, EWZ likely returns to the bottom of its consolidation near $26 weekly demand, though a short-term bounce may come first. x.comÂ
Brazilian equities remain a strong opportunity against other global emerging markets because fiscal easing, rate cuts and Brazil's critical-minerals edge survive election results. Brazil is down only 6% for the month after an earlier rally and remains near its four-month range. Lula's terms have been net positive for EWZ; this is a bet on Brazil's outlook, not on who wins the presidency. x.com x.com x.comÂ
Lula's election-time promise of student payments is not free and weighs on Brazilian equities. The proposed college benefits total R$9,500 annually per eligible student, alongside expanded high-school payments; EWZ down 25%. x.comÂ
Excellent management makes dLocal, MercadoLibre and Nu Holdings three great companies to pick up at a discount after the Lula-election selloff. Their Brazil exposure sent them down 9%, 9% and 22% on claims that the investment climate had worsened, a claim worth questioning. x.comÂ
Latin American equities' sell-off looks overdone as long as the underlying businesses keep growing and fundamentals remain intact. Under that condition, the drop is market noise, and MercadoLibre and Nu Holdings could offer attractive opportunities amid the panic. x.comÂ
Brazil's election results have turned the iShares MSCI Brazil ETF's Stage 2 continuation breakout into a Stage 4 breakdown. x.comÂ
