Brazil’s Elections May Mean Wild Ride for ETF Investors

While no one knows who will be Brazil’s next president, market uncertainty may be a safe bet in the lead-up to the Oct. 2 election to head South America’s biggest economy.  

Brazilians will choose between a pair of controversial candidates: the incumbent Jair Bolsonaro, known for his nationalist policies and warm relations with ex-U.S. President Trump, and his predecessor, former President Luiz Ignacio Lula da Silva, jailed for corruption in 2018. Da Silva currently has the lead in polls. 

Bolsonaro won when Brazil law prevented da Silva from running due to his conviction. Following Bolsonaro’s win, Brazil stocks rallied, with the iShares MSCI Brazil ETF (EWZ) gaining 44% between September 2018 and January 2020.  

The iShares MSCI BRIC ETF (BKF), which holds shares in leading Brazil, Russia, India and China companies, also performed well, gaining 59% over a similar period, as other BRIC companies outperformed Brazilian stocks.  

This year, Brazil companies have been the star performers. 

Brazil is a leading commodity producer and EWZ holds shares in many of the country’s raw material producers. That includes more than 29% exposure to metals, mining and energy giants Vale SA and Petrobras. 

Brazil’s Outperformance 

Brazil stocks this year have recovered after several years of performing worse than BRIC and U.S. markets. Those markets have declined this year. 

Source: Barchart 

The above chart shows EWZ’s 7.7% gain this year, from $28.07 on Dec. 31, 2021 to $30.23 on Sept. 6, 2022.  

Source: Barchart 

Over the same period, the BKF fell 22%, from $44.76 at the end of 2021 to $34.74 on Sept. 6.

Source: Barchart 

Meanwhile, the S&P 500 has dropped 18% this year through Sept. 6.  

While the BRIC-focused BKF underperformed the S&P 500, EWZ, the Brazilian stock market ETF, outperformed both.  

COVID-19's Toll 

The global pandemic caused nearly 685,000 deaths in Brazil, second only to the U.S., and took a toll on Brazil’s stock market and President Bolsonaro’s popularity.  

Meanwhile, rising inflation caused by historically low interest rates, government stimulus, supply chain challenges and supply-side economic issues resulting from Russia’s invasion this year of Ukraine causing raw material prices to rise to multiyear and, in some cases, all-time highs.  

As a result, shares in Brazil companies—which supply energy, agricultural and other raw materials—have outperformed the U.S. and other BRIC equities this year. 

Bolsonaro Lagging in Polls 

As of mid-August, Bolsonaro trailed da Silva, the Workers’ Party candidate, in polls by a 15 point margin.    

Last year, President Bolsonaro said he would either be killed, arrested or reelected. Hence, it seems unlikely he will fade into the sunset if he loses the election.  

The upcoming election will be a referendum on President Bolsonaro’s leadership versus the popular ex-convict Lula, who has vowed to turn over a new leaf in his leadership. So far, Brazil’s voting public is willing to give Lula a second chance, likely blaming the current president or the government’s pandemic response.  

Expect Volatility 

Brazil’s election pits the far right versus the far left with the Bolsonaro-Lula choice. This past weekend, voters in Chile rejected a new constitution proposed by its new leftist leader.  

The iShares MSCI Chile ETF (ECH) rallied in the wake of the referendum and has gained 24% this year through Sept. 6.  

The bullish reaction in Chile’s stocks on the back of the defeat of a leftist constitution may be a bad omen for Brazil’s stocks if Lula wins.

Meanwhile, EWZ will likely experience significant volatility over the coming weeks as uncertainty over the election will dominate trading and investing activity.