When markets price for certainty ahead of the event

Brazil's presidential runoff on 25 October offered a clean demonstration of how quickly a market can talk itself into an outcome that the evidence never supported. The far-right presidential candidate, Flávio Bolsonaro, led the first round of voting on 4 October, and over the three weeks that followed investors treated his victory as a given, carrying Brazil's benchmark stock market index, the Ibovespa, to a record close of 209,067 on 9 October and taking the Brazilian real below R$5.00/$ on the Friday before the vote, even though the polls showed a race that was effectively tied.

When left-wing candidate and three-time president, Luiz Inácio Lula da Silva, won with roughly 51.8% of the vote, becoming the first candidate since the return of direct elections in 1989 to take the presidency after losing the first round, a stock market position that had been built on a coin toss was unwound in a single session.

The adjustment on 26 October was severe. The Ibovespa fell as much as 17.3% intraday, triggering the circuit breaker on Brazil's main stock exchange, the B3, for the first time since March 2020, before closing 13.9% lower at 176,608, while the dollar was 8.8% stronger against the real by the end of the day. By market close on 28 October the index had slipped further to 171,006, roughly 17% below its pre-election level, with the real falling to near R$5.35/$.

Presidential elections don't reflect the state of the economy

What the markets were not reflecting was any change in Brazil's economic position, which was difficult before the vote and remains difficult after it. Gross general government debt reached 82.9% of GDP in August, its highest level since March 2021, and the Finance Ministry's survey of forecasters expects it to rise from 83.4% at the end of 2026 to 87.0% in 2027.

Brazil's benchmark interest rate, the Selic, stands at 13.75% after five consecutive cuts, and with close to half of the federal domestic debt linked to that rate, every month of tight policy adds directly to Brazil's interest bill. Those numbers would have greeted either candidate in January, and neither the optimism of early October nor the panic that followed will alter them.

The Bolsonaro administration may well have offered a more credible fiscal anchor, but anchors take budgets, legislation and several years of primary surpluses before they register in the debt ratio, and the October rally had priced in the destination without allowing for the time the journey takes.

South Africa must remember

South African investors have seen this pattern before, with one difference that sharpens the lesson. On 13 November 2017, a month ahead of the ANC's elective conference at Nasrec, the rand was trading at R14.47/$, and by 15 December, before a single delegate had voted, positioning built around a Cyril Ramaphosa victory had already carried it through R13.30/$. It touched R12.54/$ on 18 December when the result was announced, although the margin was 2,440 delegate votes to Nkosazana Dlamini-Zuma's 2,261, a 51.9% to 48.1% split, almost identical to the Lula and Bolsonaro margin, which means the market had priced a near coin toss as a certainty weeks in advance.

The bet happened to be right, and the rally ran further once Ramaphosa replaced Jacob Zuma as head of state, taking the rand to R11.50/$ on 26 February 2018, its strongest level in three years.

However, by September 2018, Statistics South Africa had reported contractions of 2.6% in the first quarter and 0.7% in the second quarter, confirming a technical recession, and the rand had weakened beyond R15/$ for the first time since mid-2016. This was a lesson for investors that you cannot price three separate events, a party vote, a change of head of state and an economic recovery, as though they were one event.

The same risk is forming ahead of South Africa's local government elections on 4 November. Polling points to a stronger showing for the DA in Johannesburg and Tshwane, and a convincing result will invite the assumption that a national victory in 2029 is a formality and that the country's trajectory changes with it.

The reality is that even the more favourable surveys suggest that Johannesburg will still require a coalition, and metropolitan councils control water, electricity distribution and municipal billing rather than national fiscal policy, the repo rate or the sovereign debt path, which is still in the hands of national government.

Why markets price for certainty too early

While political events compress months of sentiment into a single session, better municipal governance compounds slowly through service delivery and investment, and broader economic outcomes accumulate over budgets, rate cycles and earnings seasons. So, while markets price in the hope of an election outcome long before it arrives, it is advisable for them to remember that an election result must not be confused with the long-term economic outcome.