Brazil Market Plunge Threatens Israeli Mutual Funds Exposed to Ibovespa
Brazil's Ibovespa index plummeted 15% following President Lula da Silva's reelection victory, triggering sharp expected losses for Israeli mutual funds heavily exposed to Brazilian equities and financial institutions.
The Ibovespa, Brazil's benchmark stock index, plunged by approximately 15% following the surprise victory of incumbent President Luiz Inácio Lula da Silva in the presidential runoff. While Israeli institutional investors typically focus on US and European equity markets with minimal exposure to Latin America, local mutual funds present a notable exception. Ayalon Mutual Funds, managed with investment consulting from Zvulun Investment House, operates two funds heavily exposed to the Brazilian market: Ayalon Zvulun Foreign Equities and Ayalon Zvulun Foreign Equities - US Dollar Denominated. Together, these two funds manage around 365 million shekels and hold significant stakes in major Brazilian corporations, particularly banks and energy giants.
The sharp market correction in Brazil is expected to severely impact the funds' valuations when foreign assets are repriced. Furthermore, the Brazilian real depreciated by about 8% against the US dollar, increasing pressure on dollar-denominated company valuations. However, since the funds hold American Depositary Receipts (ADRs) traded in dollars, their prices already reflect exchange rate fluctuations, preventing a double blow from the currency depreciation.
The dollar-denominated fund manages 162 million shekels, with approximately 61% of its assets invested in Brazilian equities. Prominent holdings include Itaú Unibanco at 8.78%, Bradesco at 8.72%, Nu Holdings at 8.58%, Petrobras at 7.27%, Gerdau at 7.08%, Santander Brasil at 7.07%, Vale at 6.85%, and Suzano at 6.23%. These three financial institutions alone account for over a quarter of the fund's total assets.
The shekel-denominated fund manages 203 million shekels, allocating about 42% of its assets to Brazilian equities alongside a double-leveraged exchange-traded fund tracking the Brazilian market. The leveraged ETF exposure stands at roughly 6.3% of fund assets, creating an effective 12.5% exposure to the Brazilian market. This leverage significantly amplifies the fund's sensitivity to local market swings, aiming to deliver twice the daily return of its benchmark index. This substantial exposure follows a period of strong performance, with the shekel fund gaining 7.73% year-to-date and 31.49% in 2025. Both funds now face steep valuation losses following the unexpected election outcome.
The political shift materialized after Lula secured victory in the second round of presidential elections with approximately 51.8% of the vote, defeating Flávio Bolsonaro, the son of former president Jair Bolsonaro, who garnered 48.2%. Investors had heavily bet on a Bolsonaro victory in recent weeks, anticipating a conservative economic pivot that had previously fueled rallies in the local bourse and currency. Ayalon and Zvulun declined to comment on the market developments.
