Brazilian assets plummeted following the election shock. Which stocks do analysts still favor?
In recent weeks, investors have been betting on a change in Brazil's political leadership / Photo: kaliel creator / Shutterstock.com
The Brazilian currency, stocks, and bonds plummeted after the incumbent president, left-wing politician Luiz Inácio Lula da Silva, defied market expectations by winning the second round of the election, securing his fourth term.
Brazil's main stock index, the Ibovespa, plummeted 10%, after which trading was automatically suspended. The iShares MSCI Brazil ETF, which tracks the stocks of large and mid-cap Brazilian companies, fell more than 26% in pre-market trading in New York. If this trend continues, Monday will be the worst day for Brazilian stocks since at least 2000, notes The Wall Street Journal.
The Brazilian real fell more than 8% at the opening of trading on Monday.
Brazilian bonds also fell sharply in price. Some dollar-denominated issues were among the worst-performing emerging-market bonds in London trading, according to Bloomberg. For example, the yield on bonds maturing in 2037 jumped 19 basis points to 6.44%.
The sell-off also affected the stocks of European companies operating in Brazil—particularly Spanish and Portuguese ones. Shares of Spain’s largest bank, Santander—for which Brazil is the second-largest market—fell by nearly 4%. Shares of the Spanish telecommunications group Telefónica, which owns Vivo, Brazil’s largest mobile operator, fell 7%. Shares of AB InBev, which owns the Skol and Brahma beer brands popular in South America, fell by more than 3.5%.
Which Stocks Are Likely to Outperform the Market?
Amid the sell-off, Citigroup analysts on Monday compiled a list of “Lula picks”—stocks poised to outperform the market following Lula da Silva’s victory, according to Bloomberg. The list includes shares of residential real estate developer Cury Construtora e Incorporadora, aircraft manufacturer Embraer, industrial giant WEG (specializing in electrical equipment and automation), and investment bank Banco BTG Pactuall.
Bloomberg recommends that investors keep an eye on the shares of the state-owned oil and gas company Petrobras. Following Lula’s reelection, the oil giant is expected to expand its influence and play a more significant role in realizing the president’s industrial ambitions, going beyond oil production. Petrobras’ management is reestablishing the company’s presence in the fertilizer industry, expanding oil refining, and even exploring opportunities in the critical minerals sector. The company also intends to step up geological exploration in the Equatorial Margin region — the geological structure of this region resembles the oil-rich areas off the coasts of Guyana and Suriname, where some of the world’s largest oil discoveries have been made in recent years.
Petrobras tops Seeking Alpha’s list of Brazilian stocks recommended for purchase. Its analysts also advise buying shares of the Brazilian stock exchange B3 and Banco Bradesco. However, Seeking Alpha recommends holding shares of fintech company Nu Holdings, mining company Vale, bank Itaú Unibanco, and industrial equipment manufacturer WEG S.A. in your portfolio without increasing your position.
What Analysts Are Saying
The outcome of the Brazilian election came as a surprise to the market—investors had been betting on the election of right-wing candidate Jair Bolsonaro, who won the first round in early October, according to Bloomberg. Brazilian assets had been rising in value since August—investors expected that a change in political leadership could lead to tighter fiscal policy, corporate tax reform, and the possible privatization of state assets. This would help curb the growth of public debt and, in the long run, lower borrowing costs. The strengthening of the Brazilian real also supported positive market sentiment, as it could ease inflationary pressures and attract foreign capital, according to Seeking Alpha.
Investors' uncertainty is compounded by the fact that Bolsonaro has not conceded defeat and has vowed to seek the annulment of the election results.
"For financial markets, it is important how quickly Bolsonaro acknowledges the result—or at least allows constitutional procedures to run their course," Chris Turner, a strategist at ING's London office, told Reuters.
This article was AI-translated and verified by a human editor
