Last week, we described sentiment in Brazilian equities as bullish, but not yet extreme. Sunday’s surprise election result and the subsequent sell-off have reversed that picture. The first set of refreshed data puts our Brazil equity Sentiment Matters Aggregate at the 8th percentile, back below its historical buy threshold.
When markets move this quickly, precision is difficult. Some indicators are still catching up, and the rebound since Monday may already have eased some of the bearishness. But the updated data support the idea that sentiment has made much the same round trip as prices.
That brings Brazil back into contrarian territory. It does not necessarily signal an immediate recovery: who is selling matters, and the latest flows carry different messages for near-term momentum and longer-term returns.
Who Bought the Rally—and Who Is Selling?
The rally after the first round was led by foreign investors. Domestic institutional and individual investors remained more sceptical and did not join the buying to the same extent.
That makes foreigners the obvious candidates to have driven the reversal. Investors who bought in anticipation of one electoral outcome now have to reassess their positions after another. First data from Monday's flows supports this view with foreign investors being heavy net sellers with R$2.85 of net sales.
Who is buying or selling is as important as the magnitude of the flows. Not all flows carry the same message for subsequent returns.
In our historical work, foreign flows have behaved more like momentum indicators than contrarian sentiment indicators. Foreign buying has generally been followed by good returns; foreign selling by poor returns. If the data confirm sustained heavy foreign selling, that would be an indication to remain cautious about the weeks ahead.
Domestic flows have behaved more conventionally as contrarian indicators. Heavy selling by individuals and domestic institutions has historically been a more constructive signal for future returns.
Domestic institutions were the largest net sellers on Monday, at R$3.34bn. That is consistent with a more bearish institutional-flow reading, which has historically been constructive from a contrarian perspective. Whether it constitutes a strong signal will depend on where the updated indicator sits relative to its historical thresholds.
How Bullish Was Sentiment Before the Vote?
Sentiment had become bullish going into the second round, but it had not reached the extremes seen during previous Brazilian equity rallies. Foreigners and financial institutions had become enthusiastic, while individuals and domestic institutional investors remained less convinced.