“Since former President’s Dilma Rousseff’s impeachment in December 2015, the Brazilian administration has been pushing measures aimed at stabilising Brazil’s fiscal path and turning around state-owned companies. However, the country experienced a deep recession in 2015 and 2016, with GDP contracting by 3.5% each year. Since then the Government’s reform agenda, coupled with a recovery in commodity prices (such as iron and oil) have helped Brazil’s recovery as evident in GDP growth resumption coupled with low inflation and low interest rates.
Brazil’s general election starts this weekend with the first round of voting taking place on 7 October. The outcome is particularly hard to predict given the country’s very polarised political landscape. The current administration, PSDB, led by Geraldo Alkmin, has little public support, even though it brought about positive reform for the country and the politician with the most support, Lula, has been ruled out of the process by the courts as he is current serving time in jail.
The Brazilian election process takes place in two rounds and two main candidates have emerged:
- Fernando Haddad, the former mayor of Sao Paulo, is supported by the popular Lula and represents the worker’s party (PT)
- Jair Bolsonaro, often referred to as the Brazilian Donald Trump, is a relatively controversial figure in Brazil due to some of his far right views. However, he is the favoured candidate by the markets, due to his choice of economics team, led by Pulo Guedes, a Chicago trained economist and a successful entrepreneur in Brazil’s financial markets.
We expect there to be no winner during the first round of elections on 7 October, with Jair Bolsonaro likely to face Fernando Haddad in the second round on 28 October. However, there is no clear leader between them in the polls.
While the election uncertainty is high, the country’s macroeconomics and corporate sector are in good shape, especially when compared to two or three years ago. Brazil’s corporate sector has many high-quality companies with strong balance sheets and strong market positioning. This has led to high structural profitability and attractive dividend yields.
Several companies in Brazil are exposed to secular growth, where trends are driven by factors such as lower banking penetration and labour force formalisation. This is resulting in high growth in sectors such as asset management and insurance; and digitalization of the retail sector, reflected by high growth rates of digital payments companies. In our portfolios we continue to focus on high-quality names, using election volatility to our benefit.”
Ilan Furman, Portfolio Manager, Global Emerging Markets Equities, Columbia Threadneedle Investments
“Brazilian fixed income assets have been under-performing the broader emerging market universe for the last few weeks as electioneering picked up. Brazilian elections are notoriously difficult for markets to predict and while the early signs are that the market-friendly Jair Bolsonaro will prevail our conviction is low until the second round commences early next month. A Bolsonaro victory will be a positive outcome for markets as he is more likely to address the country’s fiscal challenges and interfere less in energy policy to the benefit of Petrobras, a major bond issuer. In the meantime, our funds are slightly underweight exposure to Brazil.”
