Global investors had already picked the winner. For weeks they piled into Brazil, betting Flávio Bolsonaro would take the presidency and cut spending. The Bovespa hit a record. Then on Sunday, Luiz Inácio Lula da Silva won, 51.8% to 48.2%. On Monday the market tore up the bet. The real lost nearly 8% against the dollar, and you have to go back to 1999 for a worse day. The main stock index dropped 14%, a fall not seen since the pandemic hit.
The crash hit so hard that trading stopped. The index was down 10% at the open and the exchange halted it. Trading resumed, and so did the selling. Brazil's treasury canceled this week's bond auctions. "Everyone is very surprised today," Chris Turner of ING told the Journal. The consensus had been a Bolsonaro win, he said, and the market had treated that as good news for local assets.
The damage spread to anything with Brazil in it. Petrobras (PBR), the state oil company, fell 8% in São Paulo and 14% in its U.S.-traded shares. Itaú Unibanco's U.S. shares fell 20%. The digital bank Nu Holdings fell 17%. MercadoLibre, the e-commerce group, fell 7.8%. The broker XP lost 48% in one session. The iShares MSCI Brazil fund (EWZ) closed down about 20%.
What investors are watching now
Lula, who turned 81 on Tuesday, has promised a shorter work week with no pay cut and debt relief for households. He has floated free weekend transit. Brazil's deficit is running close to 10% of GDP this year. Public debt is above 82% of GDP, and the central bank's overnight rate sits at 13.75%. Goldman Sachs economists say the first thing to watch is who gets the finance ministry, then the 2027 budget. Macquarie's Thierry Wizman expects traders to decide Brazil will "muddle through." Bolsonaro has not conceded, and Washington had not recognized the result as of Tuesday's paper. We'll leave the politics there. On Tuesday the Bovespa slipped another 0.51%.
Our read
This is Investments and Risk (IN04), and it's a lesson about crowded bets. Nobody lost money because Brazil's economy changed on Monday. They lost it because a lot of people had made the same bet on one night's result. When the result went the other way, everyone ran for the same door at once. That's single-country risk, and it hides inside funds that sound diversified. In the model books, Petrobras (PBR) is held at weight in 7 books, the Brazil fund (EWZ) in 2 and the broad emerging-markets fund (VWO) in 9. VWO holds Brazil as one slice among many. Nothing added. One day doesn't change the case for owning a slice of the world's growth. It does remind us why the slice stays small.
The one thing in your plan this touches is your international sleeve. Check this week how much of it sits in one country. Open your emerging-markets fund and look at the country weights. Picture the biggest one losing 14% in a day. If that would wreck the plan, the weight is too big. That's a two-minute look, and it's one we make in every review. The storm hit Brazil on a Sunday night. The umbrella was the fund that held a little of everything.