Brazilian markets plunged more than 5 percent to seven-month lows after the open on Monday as investors expressed disappointment over Dilma Rousseff's victory in Sunday's runoff vote.
Rousseff triumphed against opposition leader Aecio Neves with 51.6 percent of votes in what has been called one of the closest campaigns in Brazil's history.
"Growth in Ms. Rousseff's first term in office was already the weakest under any president since the early 1990s and, in the absence of a major shift in policy in her second term, we expect more of the same over the next four years," said Neil Shearing, chief emerging markets economist at Capital Economics, in a report ahead of the open. He expected stocks, bonds and the currency to fall.
Brazilian stocks were on track for their worst day in three years, with state-run oil company Petrobras down 13 percent, and banks' shares falling 4-6 percent. Brazilian 5-year credit default swaps rose 10 basis points and bond yields rose too. The Brazilian real traded above 2.5 per dollar.
"Attractive valuations might limit the downside for equities, but the real looks more vulnerable. Our 2015 forecast is for the real to hit 2.6 per dollar. Meanwhile, above-target inflation means that interest rates could rise further in the short-term, despite the weakness of growth," Shearing said.
The Next Funds Ibovespa Linked ETF, an exchange-traded fund on the Tokyo Stock Exchange that tracks several heavyweight Brazilian stocks, dropped over 7 percent on Monday—an early indication of how bad the selloff in Brazil could be.
Rousseff's administration has been criticized for hurting the economy. Its interference in macroeconomic policies and attempts to control the private sector are factors in declining foreign direct investment (FDI). In September, FDI fell 38 percent on year. Meanwhile, subsidized gas prices and capped electricity rates have contributed to Brazil's current recession.