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Takeaway: The untimely death of PSB candidate Eduardo Campos throws major wrench in Brazil’s presidential race that investors need to factor in.

First and foremost we offer our condolences to the family, friends and supporters of Brazilian presidential candidate Eduardo Campos, who died earlier today in a plane crash, along with six other victims. We also offer our condolences to the many victims of geopolitical violence around the world, be it in Iraq, Ukraine or in/around Gaza.

Risk happens fast; just like that, Brazilian stocks (using the iShares MSCI Brazil Capped ETF or “EWZ” as a proxy) closed down -1.5% on the day. This is a negative divergence versus the sample average of 24 country-level ETFs we track across the EM space (+0.6%) and versus the S&P 500 SPDR ETF Trust (SPY), which closed up +0.7%.

We think the market is continuing to price in the likelihood of a Rousseff reelection, which equates to:

  • Continued heavy-handed interference in Brazil’s SOEs;
  • A general unwillingness to take a back seat to the private sector; and
  • Unrelenting fiscal and capital account policy mismanagement.

We say “continuing to price in” because, much like we predicted back in early-JUN, the EWZ is now demonstrably underperforming on a 3M basis. It’s -2% decline over that duration compares to sample mean of +6% for the 24 country-level ETFs we track across the EM space and a gain of +2.6% for the SPY. In full disclosure, the EWZ is up +4% since our 6/3 note, but that’s lagging the aforementioned sample by -30bps; we don’t get paid to recommend crowded beta...


The call from here is simple, yet somewhat complex:

  • Campos’ death paves the way for his vice presidential candidate Marina Silva to head the Brazilian Socialist Party’s ticket, which is not her original party (i.e. Rede Sustentabilidade). PSB leadership have 10 days to officially submit another name for the party’s presidential ticket.
  • Should Silva decide to run, there is fair risk that she uses her popularity to steal votes from both Rousseff and current runner-up Aécio Neves of the Brazilian Social Democracy Party in the primaries, though likely mostly from Rousseff. Recall that she finished third in the 2010 election with 19% of the vote.
  • If she is unable to do so, or if another named candidate is unsuccessful at steering public opinion (highly unlikely at this state of the process), it is likely that Rousseff emerges victorious in a runoff election. She is currently outpacing Neves in head-to-head polls.
  • If Rousseff wins, the “vote-Rousseff-off-the-island” trade we authored back in FEB gets unwound – likely in a major hurry if investors add to positions on what may develop into widespread electoral uncertainty in the wake of Campos’ untimely death. For more details, please review our 7/14 note titled, “SELL BRAZIL?”.

Stay tuned, this could get dicey.


Darius Dale

Associate: Macro Team