- Far-right candidate Jair Bolsonaro garnered 46.7 percent of the votes in Sunday's first round. Former Sao Paulo Mayor Fernando Haddad came in second with 28.5 percent.
- Investors have recently cheered Bolsonaro because they favor his economic platform. Bolsonaro has also promised to take a tough stance against corruption.
- Investors fear a Haddad victory would maintain the types of policies that have pressured Brazil's economy.
- The Brazilian real rallied more than 2 percent against the U.S. dollar.
Brazilian stocks rose sharply Monday after far-right presidential candidate Jair Bolsonaro left his opponents in the dust in the first round of voting.
The benchmark Brazilian Bovespa index gained 4.6 percent on Monday. The iShares MSCI Brazil exchange-traded fund (EWZ) jumped 6.74 percent its biggest one-day gain since May 19, 2017, when it rose 6.75 percent.
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Bolsonaro garnered 46.7 percent of the votes in Sunday's first round, much more than any other candidate. Former Sao Paulo Mayor Fernando Haddad, the candidate came in second with 28.5 percent.
Polls leading up to Sunday's vote predicted a Bolsonaro victory, but the former army captain far outperformed those forecasts. A second voting round will be held Oct. 28 because no candidate received more than 50 percent.
"This is very similar to the U.S. election in 2016," said Danilo Kawasaki, chief operating officer at Gerber Kawasaki. "You had a far-right candidate come out of nowhere and win."
Kawasaki also said "the stock market doesn't want Haddad's Workers' Party in power," noting a victory for Haddad would lead to a sell-off in Brazilan equities.
Investors have recently cheered Bolsonaro because they favor his economic platform. Throughout his campaign, Bolsonaro said he wants the Brazilian central bank to be more independent and to privatize state-run companies. Bolsonaro has also promised to take a tough stance against corruption. Meanwhile, investors fear a Haddad victory would maintain the types of policies that that have pressured Brazil's economy.
Haddad became the Workers Party candidate after a court banned former President Luiz Inacio Lula da Silva from running again. Da Silva, better known as Lula, is serving a 12-year sentence for corruption. Lula's government — along with that of Dilma Rousseff, his successor — led to a ballooning fiscal deficit and contributed to an unsustainable pension system.
The Brazilian real rallied more than 2 percent against the U.S. dollar on Monday, trading at 3.762. Joao Ribeiro, a LatAm strategist at Nomura, expects the rally to continue "over coming days should the market solidify its conviction in a Bolsonaro victory in the second round."
"Although markets should rally as the left-wing victory tail risks dissipate, the sustainability of the rally will be highly dependent upon the likelihood of meaningful fiscal reform next year, which is still uncertain and will be a key focus of markets after the election," Ribeiro said in a note.
Brazilian stocks rose sharply last week ahead of Sunday's vote. The EWZ surged 8.7 percent while the Bovespa index gained 3.8 percent.
"Clients should be overweight Brazil and emerging market equities," Larry McDonald, head of the U.S. macro strategies at ACG Analytics and editor of The Bear Traps Report. "We believe emerging market equities will substantially outperform the S&P 500 over the next two to three years. Commodity producing countries like Brazil will be standout leaders."