LatAm assets battered as Brazil election jitters, AI rotation weigh

BRASILIA: Latin American stocks and currencies were on course for their steepest weekly decline in several months, led by a sharp selloff in Brazil fueled by election uncertainty in the region’s largest economy and a rotation towards tech-heavy Asia.

The MSCI index of regional equities slipped 0.3 percent and was on course for weekly losses of 3.8 percent - its biggest since June, while a gauge of Latin American currencies shed 0.4 percent and was poised for its biggest weekly fall of 1.2 percent since May.

Brazil’s Bovespa dropped 1.1 percent and was set for its steepest weekly loss of 6.9 percent since March, while the real weakened 0.9 percent to a four-month low.

The country’s financial markets were rattled by the minutes from the central bank’s meeting earlier this week that showed policymakers were in favour of hawkish policy, ahead of elections.

If President Luiz Inacio Lula da Silva wins, it could mean more fiscally expansionary policies, which can feed inflation, analysts said.

“Brazil’s 2026 election pits different visions of the role of the state and the private sector against one another, but it will take place within an institutional framework that will impose compromise on every candidate,” John Plassard, head of investment strategy at Cité Gestion, said.

“Brazil offers quality assets and, at times, attractive valuations, but it rarely rewards investors who ignore interest rates, currency risk and the political calendar.”

Investors were also closely watching the country’s lending market after Brazil’s largest lenders grew more cautious on credit following signs of a household debt crisis.

Separately, President Lula said he is trying to speak with US President Donald Trump, a day after the country opened a process that could result in the adoption of reciprocal measures against the United States. Brazil faces a cumulative 37.5 percent US tariff on its goods.

A rotation back into Asian AI stocks this week, as equity benchmarks in South Korea and Taiwan surged, also pressured the Latin America market that has few AI names, and was largely left out of the rally.

The commodity export-heavy economies in the region that typically track movements in crude prices, also took a hit this week after some doubts about oil demand resurfaced. Still, others say Latin American assets retain their appeal as a diversification play, particularly if the market’s optimism toward AI proves misplaced.

“Latin America looks quite attractive relative to tech-heavy Asia. There’s uncertainty over whether the pace of the AI spending boom is sustainable, so if that investment impulse eases, you might see a pullback in some Asia names,” said Katie Exum, co-head of sovereign research at Gramercy.

In Colombia, stocks rose 1 percent and were set for a weekly gain, while the peso dipped 0.4 percent. The World Bank said it had disbursed USD200 million to the country for its emergency response to a deadly August 10 earthquake that left hundreds dead.