Brazil's polarising election

25 October 2018

Brasilia

Markets remain skittish, but it would appear investors believe Bolsonaro will deliver on market-friendly social security reform and relaunched plans for privatisation.

Bolsonaro the most likely victor

After victory in the first round of voting, Jair Bolsonaro, the anti-establishment right winger, now appears to have a commanding lead over Fernando Haddad of the PT (workers’ party), ahead of Sunday’s election.

With such a polarised electorate, Haddad is paying the price for his party’s implication in corruption investigations during its 12 years in power. Bolsonaro is successfully channelling voter anger against the political establishment, and positioned himself as the only realistic anti-PT candidate.

What will the new administration look like?

Ahead of the election, the former army captain, has backed a 1980s Chilean-style economic agenda, aiming to replace the PT’s socially minded and public-sector-led strategy, with one of privatisation and liberalisation.

Investors appear to be relaxed (so far) with a Bolsonaro victory, comforted by the inclusion of free-market advocates in his prospective cabinet. However, his proposed ministers also include several ex-military advisors, so it would be premature to label this a ‘pure’ market-friendly administration.

What are the implications for investors?

Markets remain skittish, but it would appear investors believe Bolsonaro (who will outsource his economic policy to his proposed finance minister Paul Guedes) will deliver on marketfriendly social security reform and relaunched plans for privatisation. As a result, if he does win, we should expect a sharp recovery in Brazilian assets, equities, bonds and currency.

Brazil National Congress

Whoever wins will face a tough challenge. Growth in Brazil is weak and unemployment is growing once again. There would be strong opposition to potential Bolsonaro reforms. In an already polarised country, unions will challenge reforms and privatisation, while any anti-corruption drive will result in a period of policy stagnation, as bureaucrats will hesitate to sign off in case they end up in jail. The capital markets do not have the patience for this to come through. Importantly, there is support for some key ‘anchors’ to remain in post Ilan Goldfajn at the Central Bank and Guedes at the Ministry of Finance.

For the economy more generally, the situation is not bad – although inflation is ticking up, it remains at historically low levels and Brazil is not in the front line of the growing US-China trade war. Brazilian farmers are already the net beneficiaries of US tariffs on Chinese goods as Beijing reroutes its sourcing of agricultural produce in retaliation. Meanwhile Brazil is a net beneficiary of higher oil and commodity prices and the corporate sector is largely underleveraged.

With this background, investors will be happy with modest reforms and I would expect the companies in our portfolios to continue to deliver on their investment cases.


Important information

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice.
Past performance is not a guide to future returns.
Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
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