Ibovespa triggers circuit breaker after Lula’s re-election and investors reprice fiscal risk

The Brazilian stock market opened on Monday in a circuit breaker, with trading interrupted after the Ibovespa fell around 16.5%, following the re-election of Luiz Inácio Lula da Silva for a fourth term. According to manager Ramiro Gomes Ferreira, founder of Clube do Valor, the result, a turnaround in the second round, was not priced in by the market.

The future index fell by 19%, and the EWZ, a fund that replicates Brazilian shares traded in the United States, fell by more than 19%. The dollar was at R$5.60, and future interest rates were rising across the entire curve, which indicates expectations of high average rates in the coming years. The auctions for Treasury fixed-rate and IPCA+ bonds were cancelled, according to the presenter.

At the time of the interruption, Magazine Luiza fell 49%, B3 45%, BTG 34%, Banco do Brasil 30%, Bradesco 25% and Itaú 17%. Ferreira estimated that hundreds of billions of reais in market value had been evaporated. According to him, the circuit breaker had not been activated since the beginning of 2020, during the pandemic.

The turnaround and the vote extended

In the first round, Flávio Bolsonaro received around 56 million votes, against almost 54 million for Lula. In the second, Lula had 64 million, and his opponent, almost 60 million. For the presenter, research and projections were wrong in not considering the change in abstentions and blank and invalid votes. He attributes the turnaround to the mobilization of the left, the disengagement of the right and a campaign of fear among voters from classes D and E.

Sunday was marked by the extension of voting until 7pm across the country, determined by Minister Zanin, of the STF, after episodes with buses stuck in Salvador and rain in other states. The order came after 5pm, when several sections had already closed. Ferreira assesses that the measure did not change the result, but increased legal uncertainty in the eyes of foreign investors.

Tax risk and what changes for the investor

The market, according to the presenter, exchanged the expectation of a more rigorous government in public accounts for a "Lula 4" scenario similar to the third term, with more spending and more taxes. He cites a R$463 billion package in measures, including credit and tax waivers, launched in the final stretch of the campaign, and compares the situation to that of Dilma Rousseff after her re-election, with inflation, high interest rates, recession and an increase in judicial recoveries. In his assessment, the middle class tends to be the most affected.

Congress can act as a counterweight. According to Ferreira, the PL elected 121 deputies, the largest group since the 1988 Constitution, and the left represents around a quarter of the Chamber. New spending, changes to fiscal rules and nominations to the Supreme Court and the Central Bank go through the Legislature, which, in his view, pushes the government to the center due to political necessity.

The presenter outlines three scenarios: a pessimistic one, with the stock market on the sidelines, the dollar and interest rates rising; a base, with "grade six" fiscal adjustment and slower fall in interest rates; and an optimist, with a hard fiscal anchor. Before the result, the market projection was for Selic at 11.75% in 2027 and 10% in 2028. He says that no one knows which path will prevail.

Ferreira used past episodes, such as 2002, 2008, 2017 and 2020, to argue that the stock market recovered after moments of panic. He also mentioned that the Ibovespa rose almost 70% in Lula's third term, even though the debt has worsened. In his assessment, the result of a portfolio depends more on the allocation defined before the crisis than on politics. The reading is that of the presenter and does not constitute an investment recommendation.

Automatically translated from Portuguese.