Brazil After the Vote: Separating the Signal from the Noise

Brazil’s post-election selloff reflects positioning as much as President Luiz Inácio Lula da Silva’s (Lula’s) victory. When Flávio Bolsonaro unexpectedly led the first-round vote in early October, the Ibovespa—the Brazilian equity benchmark—jumped nearly 8% to a record and its currency, the real, gained about 4%.¹ Brazilian equities had gained about 16% in the four weeks before the runoff, versus 6.1% over the equivalent stretch in 2022.² Money followed price. Brazil exchange-traded funds (ETFs) listed in the United States and Europe took in about US$4.4 billion over the past month.³

But the dramatic comeback of Brazil’s 81-year-old incumbent placed him in an exclusive global club of presidents who have democratically won four terms in office. Markets, however, were less focused on history than on policy implications. A narrow Lula victory raised doubts about the pace of fiscal consolidation, and the pre-election trade unwound quickly, with Brazilian equities tumbling the Monday following the election results.

The main concern over Brazil is fiscal, and the risks are real. Gross government debt is near 83% of gross domestic product, policy rates are 13.8%, and both candidates ran on populist measures. Nor should anyone expect a swift return to calm. Brazil has long been among the more temperamental corners of the emerging world. Still, we think the starting point matters. Lula faces the most conservative Congress since the country’s re-democratization, which may limit how far policy can swing to the left. Whether that translates into fiscal discipline is another matter.

After the 2022 runoff, Brazilian equities fell 5.9% over four weeks, and the Ibovespa then gained 19% through the end of 2023.⁴ We expect markets to settle over the next 12 months as investors stop reacting to political labels and start pricing what the new government actually does. We asked Dina Ting, Franklin Templeton’s Head of Index Investments and Marcus Weyerer, Director, ETF Investment Strategy, for their views on how to think about Brazil from here.

Q: Put the recent selloff in Brazilian equities in context for us. How big a slice of emerging market (EM) benchmarks is Brazil, and what does a move like this do to broader EM returns?

Dina Ting: Enough to notice, not enough to define the outcome. Brazil carries slightly more than a 4% weight in major EM benchmarks,⁵ so a move like this shows up in EM returns, but a diversified portfolio isn’t hostage to it. This is a country-level dislocation, not an EM-wide one, and dispersion within EM is where the opportunity tends to be.

Q: How are investors acting on that?

Marcus Weyerer: Increasingly through ETFs. A single-country ETF lets you adjust that tilt, adding after a selloff or trimming if the picture worsens, without rebuilding an entire allocation. And we’re seeing that in flows. Of the roughly US$4.4 billion that entered Brazil ETFs over the past month, about US$4.3 billion went into US-listed funds and only about US$74 million into European-listed ones. About 60% of this year’s inflows arrived in that single month. That concentration is telling. Tactical, US-driven money can reverse quickly, which helps explain the size of the drop. But positioning was the story of the past month. The story for next year should be about what Lula does with a fourth term.

Dina: Right, and that’s why we’d encourage scaling in rather than trying to call the bottom. Intraday liquidity and transparent holdings make it practical to build a position gradually and add around catalysts, like who Lula names as finance minister.

Q: What should investors expect from Lula 4.0?

Dina: Possibly discipline first, spending later. Lula takes his win as a mandate to protect social programs, but he knows lower rates depend on reassuring bond investors early. A firmer 2027 primary surplus, which may be locked in by a constitutional amendment, would do that while spreading the political burden to Congress. The finance minister is the signal to watch. This is why the next few months are about catalysts, from the finance minister announcement to the 2027 budget.

For investors with a longer horizon, a selloff driven by positioning and political labels, rather than a change in fundamentals, can be an attractive entry point. In our view, a single-country ETF makes it practical to scale in gradually and add around those events instead of trying to call the bottom.

Marcus: Agreed, and expectations are low, so even modestly positive signals on cabinet picks or spending restraint could shift sentiment. The risk is that restraint may be temporary. Once rates fall and growth picks up, the pull of visible social spending should increase. Bond markets may start pricing that in early, which would keep long-term yields high and limit how far the central bank can cut interest rates.

On Congress, the right holds roughly 59% of the Chamber of Deputies and an even larger share of the Senate, and may resist tax hikes, but it tends to favor popular transfers and spending in lawmakers’ home districts. What matters is whether Lula uses this calm to repair the public finances or to set up the next spending push.

Dina: A window of restraint followed by renewed spending pressure argues for flexibility rather than a one-way bet. And fiscal policy isn’t the only swing factor. As the chart shows, Brazilian equities have tended to do better when US yields fall, so the rate backdrop matters too. ETFs let you size up as conditions improve, and then trim if they turn.