The fast-approaching election period has heightened caution toward Brazilian markets among foreign investors, who have been making sizable withdrawals from the country. Data from B3 show that in Tuesday’s session (August 11), nonresident investors withdrew R$4.7 billion from the stock market, the largest single-day outflow since April 22, 2021.

In August alone, foreign investors have already accumulated net withdrawals of R$11.9 billion from the stock market. This year, the balance of foreign funds in the local stock market peaked in April, when it showed an inflow of R$56.5 billion. Since then, outflows have totaled more than R$32 billion, reducing the accumulated positive balance in 2026 to R$24.4 billion.

At least so far, the deterioration in sentiment has shown no signs of exhaustion. Thursday (13), once again, the Ibovespa and the real ended the session lower, underperforming other comparable markets. At the close, Brazil’s benchmark stock index fell 0.23% to 167,101 points, while the dollar rose 0.25% to R$5.1925.

In the face of the recent aversion to domestic assets, the Ibovespa is now up 3.71% this year, well below the 23.3% gain recorded through mid-April. The spot dollar is now down 5.40% against the real but had fallen by nearly 11% in May.

“This is a permanent exit [by foreign investors], or at least until the election is over, is the following day. Stocks and the dollar seem to have shifted to a different level and won’t return in the short term. It seems there is no longer the seller from yesterday [Tuesday], but there is also no buyer at better prices. That is the feeling looking at prices today [Thursday],” said Ivo Chermont, chief economist at Quantitas.

One of the firms to recently change its asset allocation was Sycamore Capital, which has $180 million under management and reduced its exposure to Brazilian stocks from 5% to close to zero in client portfolios, according to Jean Van de Walle, the wealth manager’s investment director.

One factor behind the decision was the high probability of President Luiz Inácio Lula da Silva (Workers’ Party, PT) winning, Walle said. “My investment thesis was based on Lula’s defeat and Brazil joining a movement toward reforms more favorable to private-sector investment.”

Persistent inflation and the political clash between the local administration and Donald Trump were additional reasons for the change. Following the adjustments, the executive said he now holds only small positions in Vale and Petrobras.

In the foreign-exchange market, the foreign investor’s moves on Monday and Tuesday may have encouraged local funds’ activity on Wednesday, when they bought $1.3 billion, according to B3 data on the derivatives market cited by currency traders and fund managers.

Although the data contain some “noise,” because they classify local funds operated from abroad as nonresident transactions, the indicator provides guidance to market participants. In April this year, the bet in favor of the real had approached a record level, surpassing the $12 billion threshold. Since then, that position has declined sharply and, according to market participants, the net position is now short the dollar against the real by only $600 million.

If pessimism persists, the net short-dollar position could become a long position in the U.S. currency, something that has not occurred since June 2, 2025, traders said.

Jorge Dib, a portfolio manager at Galapagos Capital, notes that it is difficult to determine the true price-setter in the foreign-exchange market but says that when looking at the firm’s model for the real’s movement against other currencies, it is possible to see that politics is on the radar. “It seems to me that there is an increase in volatility because of the election, and if you look at the history of other election years, we will see that this is common.”

The executive explains that in the “carry-to-vol” strategy, volatility carries significant weight, so investors who had been pursuing this type of trade in Brazil because of high interest rates may reduce their exposure as fluctuations increase. “Given the calendar, with a ‘deadline’ for the formal registration of candidates, an increase in volatility is to be expected because the election period is effectively beginning,” he said.

In Dib’s view, even if volatility increases over the coming months, if the external environment remains favorable to carry trades and interest rates remain high in Brazil, the domestic currency is likely to regain ground in the post-election period.

“This is even with the more adverse seasonal flow, because if the real becomes more depreciated than its peers and external tailwinds are favorable, an opportunity opens up because interest rates will still be high and volatility will fall again. In other words, the carry trade becomes attractive again.”

Although he attributes the greater volatility to the election scenario, the Galapagos manager says foreign withdrawals from Brazil are not driven by this factor, but rather by the global context.

This line of reasoning is shared by Gustavo Medeiros, global head of macroeconomic research at Ashmore. In his view, foreign capital withdrawals from the local stock market appear to be more technical than directly related to the election or a rotation into other emerging markets. The Ashmore executive explains that foreign flows into emerging markets have been negative in 2026, mainly because of heavy outflows from Taiwan and South Korea following strong gains in those countries’ stock markets, a move he considers “very likely a portfolio rebalancing.”

Although he does not see the approaching election as a driver of stock-market outflows, Medeiros said he is cautious about Brazil’s contest in a scenario in which, according to him, “fiscal risk is still not priced in.”

During the session, interest-rate futures initially appeared set to decline across the yield curve, but short- and medium-term rates ended more stable, while long-term rates rose, affected by other domestic markets. The DI rate maturing in January 2027 ended unchanged at 13.75%, while the DI rate for January 2031 rose from 14.455% to 14.53%.

*By Arthur Cagliari, Bruna Furlani, Maria Fernanda Salinet and Gabriel Caldeira — São Paulo

Source: Valor International

https://valorinternational.globo.com/