Barclays sees “fertile ground” for market volatility ahead of 2026 election

“At the beginning of the year, locals were very pessimistic, while foreigners were less so—which tends to be their usual stance. Now, I see the opposite: locals are more constructive, and foreigners more skeptical,” said Secemski, who attributes this shift mainly to expectations surrounding a possible political regime change in next year’s election—expectations he found to be “much stronger among local investors than foreign ones.”

In an interview with Valor, Mr. Secemski noted that this could lead to increased instability in domestic markets due to electoral news. “This discrepancy in analysis will be confronted with reality,” he said. “If we experience a shift in scenarios that are potentially binary, it could lead to a discontinuity in asset performance… Understanding investor positioning better, it seems there are conditions in place that could result in greater volatility. It’s a fertile ground for that.”

According to Mr. Secemski, this scenario helps explain the recent instability in Brazilian assets. “Trump is an example that triggered this reassessment of political probabilities,” he said, referring to U.S. President Donald Trump’s announcement of 50% tariffs on Brazilian imports starting August 1. “This raises questions among investors—rightly so—given Brazil’s still-fragile fiscal situation.”

During his discussions with clients, Mr. Secemski observed that local investors tended to downplay the importance of events that, in other circumstances, might have had a stronger impact on asset prices. He noted that Brazil’s fiscal outlook remains largely unchanged from earlier in the year, even if some adjustments have extended the life of the fiscal framework for this year—and possibly the next.

“But we haven’t seen changes that would lead the fiscal issue toward debt stabilization. Still, the market narrative has changed significantly—particularly among locals, who have shrugged off some fiscal headlines that foreigners have not been so quick to dismiss,” said Mr. Secemski.

With the prospect of a regime change, local investors have effectively priced in a “new fiscal arrangement,” he said. “This has reduced anxiety, especially compared to what we saw in November and December of last year. But foreign investors assign a much lower probability to this scenario.”

Foreign investors, he added, still carry a “residual memory of the market turmoil” at the end of last year. “That left many investors with zero exposure. So there’s some hesitation to come back,” he said. Between November and December, a worsening in fiscal risk perception, combined with a more challenging global environment following Trump’s U.S. victory, triggered a significant selloff in Brazilian assets. The dollar rose to R$6.30, and the yield curve priced in a Selic rate above 17%.

“There’s also the impression [among foreigners] that the electoral process is still far off, with a lot of uncertainty around who the candidates will actually be and what conditions they’ll be running under,” the economist added.

Mr. Secemski also noted a changed global environment. Six months ago, with Mr. Trump just beginning his term, the outlook was for a strong dollar globally. “Today, that story has flipped 180 degrees. The expectation is for a weaker dollar, which supports emerging markets. We must consider that, but in Brazil’s idiosyncratic component, we don’t see significant changes. For a fiscal outlook that’s still the same, market conditions were much more stressed at the end of 2024 than they are today,” he emphasized.

The differences between local and foreign investor views also help explain current positions in domestic assets, Mr. Secemski said. “Most local clients are in fixed-income positions [betting on interest rate cuts] and long the real \[betting on appreciation of the Brazilian currency], although not at full capacity. Abroad, we also see investors long the real—a fairly universal move given the weak dollar and high carry—but not with the same exposure in interest rates,” he said.

That positioning is somewhat unusual, as foreign investors typically show a greater appetite for rate positions, especially at longer tenors. The focus on FX, however, reflects some reluctance among foreigners to take on greater exposure to domestic financial assets amid lingering political uncertainty.

“I think the rates component is more linked to the need for clearer evidence of economic deceleration, which isn’t yet visible—especially in labor market data,” Mr. Secemski said. “The improvement in current inflation is mostly in tradable goods and food—largely due to the stronger real. There’s no conclusive sign of a consistent trajectory toward the inflation target, which calls for caution on rate bets, while FX conditions are more favorable externally,” he noted, citing this year’s more than 10% drop in the DXY index, which tracks the dollar against a basket of major currencies.