Brazilian markets react to election worries as investors reduce exposure

Brazil’s famous carry trade, long a magnet for yield-hungry investors willing to stomach emerging market risk, is losing its charm. With the country’s October 2026 presidential election drawing closer and polls showing a tightening race, some of the biggest names in global asset management are quietly heading for the exits.

VanEck, Vontobel, and Aberdeen have all begun trimming their Brazilian exposure in recent weeks, a coordinated retreat that speaks volumes about the market’s growing anxiety over what could be a volatile and unpredictable electoral cycle.

The carry trade unwind

VanEck’s David Austerweil and Eric Fine are now avoiding Brazilian local fixed-income assets altogether, citing rising election risks as the primary reason. Vontobel’s Thierry Larose has taken an underweight position on the real. Aberdeen’s Kieran Curtis is trimming BRL exposure too, pointing to what he describes as a limited downside cushion, meaning there isn’t enough margin of safety to justify staying fully invested.

The election equation

Brazil’s first-round presidential vote is scheduled for October 4, 2026, with a potential runoff on October 25. The poll registration deadline falls on August 15, 2026, which means the political landscape will begin crystallizing in the coming months.

Recent polling shows incumbent President Luiz Inácio Lula da Silva still leading, but his margins against challenger Flávio Bolsonaro are narrowing. The political tension has already started showing up in asset prices. The real has underperformed relative to other emerging market currencies, and implied volatility across Brazilian equities, bonds, and currency markets has been climbing. Equity downgrades have compounded the problem, as have external headwinds like US Federal Reserve policy keeping the dollar elevated.

What to watch from here

The August 15 registration deadline will be a key inflection point. Once the candidate field is formally set, markets will have a clearer picture of what they’re pricing.

As implied volatility rises, protecting downside gets more expensive, which can erode the very carry returns that made the trade attractive in the first place.

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