Brazil's polarising election
25 October 2018
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.
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
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.
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.
The opinions contained in this document are those of the
named manager(s). They may not necessarily represent the
views of other Martin Currie managers, strategies or funds.