Brazil ETFs brushed off the broader market weakness and surged back above their trend lines after far-right presidential candidate Jair Bolsonaro took the lead in the first round of votes.
Among the best performing ETFs of Monday, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) increased 6.1% and broke above its long-term resistance at the 200-day simple moving average. The iShares MSCI Brazil Small-Cap ETF (NasdaqGM: EWZS) advanced 6.3%.
Meanwhile, the leveraged long Direxion Daily MSCI Brazil Bull 3X ETF (NYSEArca: BRZU) jumped 18.2%. The Direxion Daily MSCI Brazil Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the performance of the MSCI Brazil 25/50 Index.
Fueling the rally in Brazilian equities, Bolsonaro gained a better-than-expected 46.7% of the votes in Sunday’s first round vote, overtaking all other candidates, CNBC reports. In comparison, former Sao Paulo Mayor Fernando Haddad came in second with 28.5%.
A second round of voting will occur on October 28 since no candidate garnered more than 50% of the vote.
“This is very similar to the U.S. election in 2016,” Danilo Kawasaki, chief operating officer at Gerber Kawasaki, told CNBC. “You had a far-right candidate come out of nowhere and win.”
Kawasaki also said “the stock market doesn’t want Haddad’s Workers’ Party in power,” adding a victory for Haddad would trigger a sell-off in Brazilan equities.
Bolsonaro is seen as a market friendly contender due to his favorable economic platform. The presidential candidate wants the Brazilian central bank to be more independent and to privatize state-run companies. He has also pledged to take a tough stance against corruption.
In contrast, investors fear a Haddad victory would maintain the status quo, which has dragged down Brazil’s economy to where it is today.
Joao Ribeiro, a LatAm strategist at Nomura, expects the rally to continue “over coming days should the market solidify its conviction in a Bolsonaro victory in the second round.”
“Although markets should rally as the left-wing victory tail risks dissipate, the sustainability of the rally will be highly dependent upon the likelihood of meaningful fiscal reform next year, which is still uncertain and will be a key focus of markets after the election,” Ribeiro added.
Bank of America Merrill Lynch also also upgraded Brazilian equities to overweight from neutral ahead of Bolsonaro’s potential presidential election win, citing the easing of political uncertainty and discounted valuations in response to the favorable vote counts, Bloomberg reports.
“While the final outcome will only be decided in three weeks, we believe the market will view reduced uncertainty positively,” BofAML strategists wrote in a note. “Since 1989, the winner of the first round has been victorious in 5 out of the 5 presidential elections.”
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