Azevedo, Vinícius Andrade and Leda Alvim Investors blindsided by President Luiz Inácio Lula da Silva’s re-election are balking at buying into Brazil’s markets after bullish bets on the nation’s assets unraveled spectacularly.

Citigroup Inc., Morgan Stanley and other big banks, which had advised loading up on Brazil before the vote, rushed to recommend clients pare back on what had been one of this year’s favored emerging-market trades amid Monday’s selloff. Even market-watchers urging investors to consider stepping in to take advantage of the discounted prices, including Gavekal Research, warned that risks remain, with Lula’s fiscal policy the chief concern.

Wall Street had piled into Brazil after right-wing challenger Flávio Bolsonaro emerged from the first round in early October with a lead, unleashing a powerful rally across local markets that drew billions in foreign cash. Investors wagered that a change in government would usher in policies to tackle the nation’s massive budget deficits, ultimately giving officials room to lower double-digit borrowing costs.

Instead, assets across Latin America’s biggest economy cratered on Monday. The real dropped 8%, the most in more than two decades, and the benchmark Ibovespa index of stocks plunged roughly 14%, the most since early 2020. Swap rates skyrocketed almost three percentage points, and Brazil’s dollar bonds trailed emerging-market peers.

At Aberdeen, the decision is to stand pat for now, pending signals from Lula’s administration on his economic team and fiscal plans.

“We won’t see many elections like that in a lifetime,” said Kieran Curtis, the firm’s head of emerging-market local currency debt. They’re not buying more, he said, because they already had Brazil exposure, “but we’re not selling either.”There’s signs of tentative stability, particularly in the real, which has rebounded in both sessions after the Monday rout. However, in a sign of the swing in sentiment, the real is now this month’s weakest developing-world currency — before Monday it was the second-strongest.

Swap rates have largely edged lower, while the Ibovespa has continued to fall — the benchmark index was down 2.2% in Sao Paulo on Wednesday after closing 0.5% lower the previous day.

The speed and magnitude of Monday’s declines, which triggered trading halts across assets, revealed just how heavily investors had bet that new leadership would move to curb a budget gap exceeding 9% of the economy. That’s even though Bolsonaro had offered only vague pledges to slash the deficit.

Citigroup unwound its bullish positions in Brazilian assets after the election, while Morgan Stanley strategists reversed a three-week-old upgrade on the country’s stocks, lowering them to equal-weight. JPMorgan Chase & Co. cut its recommendation on the real and local rates to market-weight.

Brazil faces severe fiscal strains, with household delinquencies and corporate defaults at record highs. Lula’s administration is seen as more inclined to maintain social benefits and boost consumption through credit, while relying largely on revenue increases to shore up public finances.

The challenge for Lula is that households and companies are already highly leveraged, and he has little room for fiscal expansion, said Daniel Utsch, a portfolio manager at Nero Capital in Sao Paulo. “Markets will put Lula against the wall and force him to decide what he is going to do,” he said.

UBS Global Wealth Management expects Brazilian stocks to remain under pressure as markets reprice the outlook for interest rates, particularly until investors hear more about Lula’s fiscal intentions. The interest-rate curve erased odds of further rate cuts, and is now pricing in potential hikes.

Alejo Czerwonko, the firm’s chief investment officer for emerging markets, expects the so-called carry trade to support the real, as investors procure funds in countries where borrowing costs are lower and buy into Brazil’s higher rates. And then there are those who see an opportunity.

At Wells Fargo, strategist Alvaro Vivanco said he expects enough fiscal measures from the new government to contain the risks, especially for the real. He called the reaction after the vote “overdone,” recommending buying at about 5.56 per dollar, around its weakest level Monday, and sees it strengthening toward 5.30. It was around 5.35 on Tuesday.

“An overshoot has taken place in FX and rate markets,” said Lamine Bougueroua, an EM fund manager at Carmignac. “Brazil remains a winner in the current economic context, marked by high commodity prices and a resilient global expansion,” with the currency in particular poised to benefit.

Investors shouldn’t lose sight, he said, of gains made by the more business-friendly parties in Brazil’s Congress, which will limit the scope for further fiscal expansion.

Rajiv Jain, co-founder of GQG Partners, said he’s preparing to buy after the panic, as he also sees the markets as having overreacted. Brazilian companies remain attractively valued, he said, with strong earnings and high dividend yields.

Ultimately, both the bears and those thinking of putting money to work agree on one thing: Addressing Brazil’s budgetary challenges is paramount.

“Yields have gotten very high, and that makes the math of fiscal sustainability very unpleasant,” said Aberdeen’s Curtis. “There needs to be a fiscal adjustment in response.”