- Brazil's Ibovespa index plunged 17% post-election, marking a historic market crash
- Senator Flavio Bolsonaro was favored to win, causing a market rally before the vote
- President Lula da Silva won runoff with 51.79%, surprising markets and investors
Brazil is the latest example to warn retail traders against speculating on election outcomes. The country's stock market witnessed a bloodbath on Monday, with the benchmark index Ibovespa collapsing 17% shortly after the opening bell. Add the 11-12% plunge in the local currency real, and this translates into a crash of nearly 30% in dollar terms.
What led to the rush of capital into the Brazilian market was the direction shown by prediction markets. Polymarket and Kalshi gave Senator Flavio Bolsonaro an 80% and 81% chance of winning Brazil's presidential runoff. Brazilian stocks and the real had rallied for three weeks on that bet.
Bolsonaro, the son of former president Jair Bolsonaro, was the right-wing challenger in the fray, whose victory was expected to align Brasilia more with Washington, and replace the incumbent government's socialist policies with more business-friendly measures.
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While the money in the equity market made up its mind, the voters vetoed the same with their right to franchise. On Sunday, Brazil's voters delivered a historic victory for President Luiz Inacio Lula da Silva, who won 51.79% of valid votes against Bolsonaro's 48.21%. Interestingly, he became the first Brazilian president to win a runoff after losing the first round.
The shock results led to the market bleeding on Monday.
A Circuit Breaker, Then A Collapse
The Ibovespa fell more than 10% in the opening auction, and exchange operator B3 halted trading for 30 minutes. It was the first circuit breaker since the Covid crash of 2020.
When trading resumed, the slide deepened. The index hit a low of 169,516, down 17.3% from Friday's close of 205,083. As of 12:11 pm Brasilia time (8:41 pm IST), it was at 173,388, down 15.45%.
The losses were brutal at the stock level. Retailer C&A, conglomerate Cosan and exchange operator B3 each fell about 50% in the morning session. Banks were hit hard as markets repriced fiscal risk. BTG Pactual fell as much as 37% and Banco do Brasil 31%.
Exporters, which benefit from a weaker currency, were among the few gainers.
The Currency Took The Second Hit
The dollar jumped from about R$4.99 on Friday to as high as R$5.605 on Monday morning, a 12% surge. By 8:53 pm IST it had eased to R$5.42, still up about 9%.
For foreign investors, that meant losing twice, as the currency compounded their losses. The iShares MSCI Brazil ETF (EWZ), which trades in dollars, fell more than 25% before the US open. If sustained, that would be its worst day since its 2000 launch, beating a 23.1% fall in March 2020. It pared losses to about 21% in early New York trade.
The pain spread to bonds, with Brazil's Treasury cancelling its scheduled government bond auctions as yields spiked.
How Wall Street Got It So Wrong
After Bolsonaro unexpectedly topped the first round on Oct. 4, his odds on Kalshi jumped from about 60% to over 80%. Polymarket had him at 85%. Funds piled in. By Friday, Brazilian stocks were almost 7% above their pre-first-round level, and the real was nearly 5% stronger. The EWZ was up 34% for the year.
The bet rested on fiscal hopes, as investors saw Bolsonaro as more likely to cut spending and push pro-business reforms. Brazil runs a budget deficit of about 7% to 8% of GDP, and public debt is above 82% of GDP.
A Citigroup survey of 73 investors before the vote showed most expected the real to fall at least 5% if Lula won. In other words, the market knew the downside, but it simply judged that outcome unlikely.
What Brazil's Bloodbath Means For D-Street
Lula's win was expected to trigger an extreme reaction in the Brazilian market, but there was no sign of caution for India yet. Both the headline indices snapped a four-day losing streak, with the Sensex rising 482.92 points, or 0.66%, to 73,606.75, and the Nifty gaining 153.20 points, or 0.68%, to close at 22,753.20. The rupee slipped 25 paise to 95.19 against the dollar, but traders tied that to high crude prices, not Brazil.
There is, however, a catch. Indian markets closed at 3:30 pm IST. Brazil's cash market opened at 6:30 pm IST and hit the circuit breaker minutes later. Dalal Street traded knowing the election result and an early 15% fall in a Tokyo-listed Brazil ETF, but not the full scale of the crash.
That makes Tuesday's open worth watching. But Kranthi Bathini, director of equity strategy at WealthMills Securities, expects little fallout. He told NDTV Profit that the Indian market has its own worries, and that Brazil's impact on it "should be negligible".
The same goes for the currency, according to Bathini. He described the real's slide as largely a regional challenge for Latin America. For the rupee, he said, the main pressure remains crude oil.
The Indian Stocks With Brazil Exposure
A few Indian companies have real money riding on Brazil.
UPL is the most exposed. Brazil accounts for roughly a fifth of the agrochemical maker's sales, and the company holds about 10% of Brazil's crop-protection market. Its shares fell 2.15% to Rs 497.70 on Monday, even as the Nifty rose.
Torrent Pharma is the other big name. Its Brazil revenue rose 38% to Rs 440 crore in the July-September quarter. In local currency, though, growth was only 20%, which means a strong real did much of the lifting. That tailwind now turns into a headwind. Torrent also plans to launch semaglutide in Brazil within six to nine months. Its shares rose 0.57% on Monday.
Lupin, Bajaj Auto, Hero MotoCorp, Royal Enfield and Samvardhana Motherson have smaller but growing businesses in Brazil, ranging from GLP-1 drugs to motorcycle plants in Manaus.
History offers a guide. When S&P cut Brazil to junk in September 2015, Torrent Pharma fell 4.83% and UPL 4.53% in a single session.
Bathini expects the hit to be limited this time. He told NDTV Profit the immediate reaction in these stocks could be negative, driven by worries that Brazil's policies may change. But he does not see a real impact on their revenue.
Whoever governs, he said, tends to create a business-friendly environment over time, even if such decisions take longer to arrive. On that view, any sell-off in Indian stocks with Brazil exposure would reflect sentiment, not fundamentals.
Threat Or Opportunity?
The bigger question for India is where the money goes next. Bathini sees little overlap between the two markets. He described the Ibovespa as largely a commodity play, unlike India's broader market. India's bigger concerns, he told NDTV Profit, are rising crude prices and inflation. On the positive side, he said the ongoing earnings season "has been quite good so far, with no negative surprises".
That suggests money leaving Brazil is unlikely to drag India down with it. Whether any of it flows into India will depend more on oil and earnings than on events in Sao Paulo.
For now, the lesson from Brazil is simple. When the crowd is 80% sure, the remaining 20% can still be very expensive.
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