The searing financial-market rallies unleashed by elections across Latin America are beginning to show signs of cracks — sowing doubts among money managers over whether to keep pushing stocks and currencies even higher or lock in profits as campaign promises start colliding with the difficulty of governing.

By Vinícius Andrade, Carolina Wilson and Maria Elena Vizcaino In Colombia, after President Abelardo de la Espriella’s first-round victory in May, the currency soared, bond yields plunged and equities rallied more than 20% off their lows. But just two months since his swearing in, the gains have lost momentum as the conservative leader faces what his advisers called the country’s worst fiscal crisis since the 19th century. In Chile, a rally that drove stocks to record highs after the election of pro-market President Jose Antonio Kast 11 months ago has fizzled.

The struggles of right-wing leaders in Peru, Ecuador and Argentina to preserve their popularity and push through their agendas offer a cautionary tale for investors who’ve piled into Brazil, driving stocks up more than 20% since mid-August on expectations that Flávio Bolsonaro will oust President Luiz Inácio Lula da Silva in this month’s election.

Some money managers, including London-based hedge fund Frontier Road and Fidelity International, have scaled back exposure to the region. Others are sticking with the trade. VanEck’s Eric Fine, who is “max overweight” on Brazil’s local-currency debt, sees room for further gains but has concerns they could be curbed by the nation’s fiscal challenges.

“There are absolutely risks that we see this early euphoria give way to disillusionment,” said Matthew Graves, a portfolio manager at PPM America in Los Angeles. “These elections were ‘change elections,’ more about a rejection of the status quo than necessarily a strong vote in favor of something like fiscal austerity.”For more than a year, traders piled into assets across Latin America, seizing on attractive valuations in anticipation that discontent with left-wing incumbents would usher in a rightward political shift like the one that brought Javier Milei to power in Argentina three years ago.

The speculation drove an MSCI index tracking Latin American equities to a gain of more than 70% since the start of last year and turned debt from Bolivia and Ecuador into some of the best performers in emerging markets.

But the enthusiasm that powered those gains is starting to fade. Dollar bonds from Ecuador and Peru — both of which elected market-friendly presidents in recent years — have fallen more than 3% over the past three months.

Martin Bercetche, a credit-focused portfolio manager at Frontier Road, has pared back nearly all his exposure to Latin America after being “very bullish” on the region for more than 18 months due to the political changes taking place.

“That thesis has largely played out,” Bercetche said. “We continue to like Ecuador, as we believe there is value in the spreads there.”“But outside of that,” he added, “we are very light.”Ecuadorian President Daniel Noboa’s once-soaring popularity, fueled in part by his tough-on-crime policies, helped give him the political capital to push through fiscal reforms and narrow the country’s budget gap. But his approval rate has since tumbled and fuel subsidies have been reintroduced as the country is hit by the Iran war’s energy shock, a move that has weighed on Ecuador’s dollar bonds in recent months.

The waning euphoria shows how quickly political capital — and the market optimism built around it — can erode, casting a shadow over Brazil.

If the country’s next leader focuses more on working with Congress and pushing through a much tighter government budget “then all risk assets in Brazil can deliver double digit returns from here as a starting point over the next 12 months,” said Polina Kurdyavko, head of emerging markets at RBC BlueBay Asset Management.

“If there is more focus on other political priorities, then we think that this rally can be relatively short-lived,” she said.

There are a few signs the political momentum could translate into policy victories. On a recent trip to New York, Colombia officials voiced confidence that their proposal to slash the fiscal deficit by more than four percentage points by 2030 will win support from lawmakers.

Bolsonaro, if elected in Brazil, would also benefit from a Congress tilted to the right, with his political allies set to control more than a third of the Senate from 2027. Still, there’s considerable doubts about what’s coming next. In Peru, President Keiko Fujimori has seen her popularity plunge just months into her term amid mounting concerns over the economy and crime.

An upcoming test will be Argentina, where Milei’s weakening popularity is already unnerving investors almost one year before the presidential election, pushing sovereign bond yields back into double digits amid concerns over the impact of uneven economic growth, a weak labor market and the fallout from his austerity drive on voters.

“It is too soon to conclude that voters across the region are demanding economic orthodoxy or market-based reforms,” said Eamon Aghdasi, a sovereign debt analyst at Grantham Mayo Van Otterloo & Co. Investors “are looking for some combination of improved fiscal performance and political stability, and I don’t think we have the evidence for either quite yet.”

What to Watch China’s GDP and activity data will offer a read on the economy heading into year-end Central banks in Indonesia and the Philippines are likely to raise rates by 25 basis points Turkey’s central bank will likely cut the one-week repo rate by 100 basis points, while Russia and Hungary are expected to keep rates unchanged