Why Ambev S.A. Dropped Today

Shares of Ambev S.A. (NYSE:ABEV) fell hard on Monday, down 15.5% as of 1:47 p.m. EDT.

Ambev is the Latin American subsidiary of global beer giant AB Inbev (NYSE:BUD), which owns a slight majority of Ambev S.A.

While the beer industry has been struggling in recent years, today's sell-off has nothing to do with company-specific financials. Rather, the surprise win by far-left candidate Luiz Inácio Lula da Silva in the Brazilian Presidential election yesterday appears to have caught investors in Brazil, who were betting on a win for the more business-friendly Flávio Bolsonaro, off guard.

Lula's win shakes up Brazil stocks

Ambev had rallied in recent weeks, along with most Brazilian stocks, following the first round of the elections on Oct. 4. That's because Bolsonaro was the top vote-getter in that round, with 47% to Lula's 45%. However, Brazil's election operates on a two-round system if no single candidate gets more than 50% of the vote. In the second round held this past weekend, which other candidates did not participate in, Lula da Silva surprisingly pulled out a victory, with 51.8% of the vote against Bolsonaro's 48.2%.

Investors were understandably surprised; after all, the election marked the first time since democracy returned to Brazil in 1988 that the first-round winner didn't go on to win the second round.

Da Silva has promised rather lavish welfare payments through various means, including debt relief for struggling households, shorter working hours, and free public transportation on weekends, among other measures. The increased spending and likely increased regulation of business also spurred a sell-off in Brazil's currency and bonds.

One might wonder what this has to do with the price of beer. First, Lula's reputation as relatively anti-business and anti-free-market capitalism is one aspect. The sell-off in Brazil's currency and bonds also indicates an increased risk of inflation and currency debasement. If the value of the Brazilian Real falls relative to the U.S. dollar, Ambev's Real-denominated sales and earnings would be worth less in U.S. dollar terms, all else being equal.

Image source: Getty Images.

Ambev fares better than other sectors, though

While Ambev's decline is no doubt severe, Brazil's financial and energy sectors appear to be down by much more today. This is because the financial implications of Lula's win would likely be felt more acutely in the financial sector, as well as in the government's increasing control of the country's oil and gas revenues.

While Ambev stock may now look quite cheap, trading at just a 14.7 P/E multiple and with a dividend yield of 4.1%, larger economic factors make it riskier than investing in the company's parent, which sells beer all over the world.

Investors will learn more details on Thursday, Oct. 29, when the company reports third-quarter earnings.

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.