Early election trade is brewing for Latin America investors

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Growing discontent with left-wing governments is helping fuel a rally in Latin America, with traders scooping up assets at rock-bottom valuations on early bets that the next wave of elections in 2026 will usher in more business-friendly regimes.

Investors at T. Rowe Price and Frontier Road Limited are placing wagers in Colombian stocks and bonds, taking advantage of extremely cheap prices. Some Brazil hedge funds, like Mar Asset Management, are building options bets that gain from stocks rallying.

All mention potential upcoming regime changes as part of the reason for the trades — which are happening much earlier than the usual election cycle, emboldened by a global backdrop that’s seen the re-emergence of Donald Trump in the US and the advance of the far-right in Europe.

Investors “are focusing on these dynamics earlier than the typical election cycle historically has seen,” said Bret Rosen, economist and strategist for Latin America at hedge fund EMSO Asset Management. “Markets are paying attention to polls including ones that pose hypothetical matchups even though we don’t know who the candidates will actually be.”

An index of Latin American stocks is having the best start to the year since 2012, posting more than five times the return of the S&P 500 and double that of other developing regions. Colombian equities are up almost 30% in dollar terms as analysts from Morgan Stanley to Ashmore predict gains citing the May 2026 election. In Brazil, President Luiz Inácio Lula da Silva’s declining approval ratings — or any sign he won’t run for office again in October of next year — have sparked wild intraday gains.

The potential payout of a political reshape — combined with cheap asset prices — is being compared to what traders saw in Argentina. The election of Javier Milei in 2023 with a promise to radically cut spending after decades of mismanagement from left-leaning governments sparked one of the most profitable trades in emerging markets last year.

A shift to the right in the region “has a huge amount of implications,” Porter Collins, co-founder of Seawolf Capital LLC and one of The Big Short traders, said at an alternative investments conference in Miami last month.

Mar, a Rio de Janeiro-based hedge fund launched by veterans of Banco BTG Pactual SA and 3G Capital, has built an options bet on Brazilian stocks rallying. It bought long-dated calls on the iShares MSCI Brazil ETF, the largest exchange-traded fund in the US tracking local equities.

Offshore investors poured about 1.4 billion reals (US$244 million) into Brazilian stocks on Feb. 14, the day when a survey showed Lula’s approval ratings hitting an all-time low, according to exchange data compiled by Bloomberg.

In Colombia, the view that President Gustavo Petro’s mismanagement will lead to a more conservative, pro-business candidate winning the next election has fuelled the best stock rally in the world.

For both, the fact that prices are dirt cheap has also helped. Latin American stocks are selling for 8.6 times blended-forward 12-month earnings, well below the 10-year historical average of 11.5 times, according to data compiled by Bloomberg.

“Stocks are so cheap that what you need is a catalyst. And you want to be positioned ahead of that,” said Verena Wachnitz, who manages Latin American stocks at T. Rowe Price. “I believe that we will see a turn into market-friendly governments in Chile and Colombia.”

In Chile, which holds elections late in 2025, President Gabriel Boric is facing low popularity, and early polls are signalling a shift to centre. There are still no clear candidates in both Colombia and Brazil. Petro can’t run again, and it’s still unclear if Lula, 79, will seek reelection.

A political shift is also playing out in some of the world’s largest economies, with the latest example coming from Germany where a conservative alliance won Sunday's election. The outcome of the vote gave an early boost to the euro on speculation that it may pave the way for more spending to prop up economic growth.

The resurgence in Latin American markets can also be seen in currencies — which are getting a boost by the lack of US tariffs so far, as well as high interest rates that have supported carry trades. Brazil, Colombia and Chile are all among the top five performing EM currencies this year, up at least 5% each versus the dollar.

In credit markets, meanwhile, investors are hunting for new plays after a year in which high-yield bonds delivered double-digit gains. Martin Bercetche, a hedge-fund manager at London-based Frontier Road, is rotating into “names that have significantly underperformed the last two years,” and trading at about 200-300 basis points over US Treasuries, like Colombia and Brazil.

Investors know elections tend to include unexpected twists and have been wary of opinion polls — especially this early in the race. A tighter than expected race recently burned investors in Ecuador, sending bonds sliding. Still, the potential for outsize gains is too alluring for some.

“If you wait until elections to enter the trade, it may be too late,” said Eduardo Alhadeff, a partner who oversees credit portfolios at Sao Paulo-based Ibiuna Investimentos. “Argentina was a lesson for global investors: Not everybody caught that rally.”

by Jorgelina do Rosario, Vinícius Andrade and Carolina Wilson / Bloomberg

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