Lula has 71 days to stop Brazil’s rout hitting global portfolios: deVere CEO
Global investors now face a 71 day countdown that will decide whether Brazil’s election sell-off becomes a short, sharp correction, or a costly fiscal crisis, warns the CEO of deVere Group, one of the world’s largest independent financial advisory organisations.
The comments from Nigel Green come as Luiz Inácio Lula da Silva secures a fourth term, the first candidate since 1989 to lose the opening round and still win the presidency, while defeated rival Flávio Bolsonaro seeks to have the result annulled.
He says: “Anyone holding an emerging market fund, a Latin American bond portfolio or a pension invested overseas now has a stake in Brazil’s next 71 days.
“Between today and Lula’s inauguration on 5 January, his government has to convince markets it’s serious about getting debt under control.
“Get that right and much of this sell-off could unwind surprisingly fast. Get it wrong and losses likely deepen across emerging market holdings worldwide, hitting savers through the funds they own.”
The countdown begins from a brutal starting point.
In early trading in Asia, a Tokyo-listed fund tracking Brazilian shares lost nearly 15% and real futures dropped around 10%, as international money that had bet heavily on a conservative victory raced for the exits.
“Global funds spent weeks pricing in a government expected to slash spending. They woke up to the opposite.
“Brazilian shares had climbed around 27% this year, with plenty of international capital riding the move, and a big chunk of those gains is now being handed back.
“The real has also been one of the world’s favourite carry trades, with investors borrowing cheaply elsewhere to earn Brazil’s double-digit rates.
“A 10% currency drop wipes out most of a year’s interest in one move, and positions like those can unwind fast.”
The deVere CEO believes the annulment bid is unlikely to gain traction, given a winning margin of more than 4 million votes, over twice the gap by which Jair Bolsonaro lost in 2022.
“The legal challenge is a sideshow. For investors abroad, these 71 days come down to fiscal arithmetic, and the arithmetic is tough.
“Gross debt hit 82.9% of GDP in August, the highest since early 2021. The policy rate sits at 13.75% even after five straight cuts. Household loan defaults are at their worst in two decades.
“Those are the figures global bond buyers will judge Lula’s plan against.”
Nigel Green sees the 2027 budget as the decisive moment, complicated by voters returning the most conservative Congress since Brazil’s return to democracy.
“Lula can’t pass a credible fiscal plan without a Congress that leans against him, so the clock is running on a political negotiation as much as an economic one.
“International investors remember the last time confidence cracked.
“Two years into the previous term, fiscal anxiety dragged the real to a record low of around 6.74 to the dollar, and foreign holders of Brazilian assets took the hit twice, in price and in currency.”
As Latin America’s largest economy, Brazil carries the heaviest weighting in most regional equity benchmarks, and global funds frequently treat the region as a single trade.
“Every day this countdown drags on without clarity, global funds are likely to keep trimming Latin American exposure as a block.
“Mexico, Chile and Colombia can get pulled down regardless of their own fundamentals, and indiscriminate selling like this is where the region’s biggest mispricings tend to appear.”
Nigel Green believes Brazil also offers bond markets everywhere a preview.
“Brazil is a live test of how much fiscal looseness bond markets will tolerate in a world weighed down by government debt.
“Far bigger economies face the same question, and how investors treat Brazil over these 71 days may hint at how they’ll treat them.
“Political surprises can reprice an asset class within hours, and currency swings can quietly erase gains made abroad. Spreading exposure across regions and currencies is what cushions those blows.”
He concludes: “Lula has built a career on improbable comebacks. Global investors now need Brazil’s markets to stage one of their own, and they’ll know by 5 January whether his government can deliver it.”