While still a longshot to win, the performance of the pro-business Neves, head of the centrist Brazilian Social Democracy Party had commentators and investors mulling the various implications of a pro-business government in the country.
No doubt underlying some of the knee-jerk optimism was the performance of India’s stock market on the back of that country’s new pro-business president Narendra Modi. But, while a pro-business government in the country would be welcomed by investors, there remain a number of obstacles in the way of significant change in the country.
First, a victory for Neves remains a long shot, he took 33.5% of the vote in the first round, but that was at the expense of former rubber-tapper Marina Silva –who polls had put in second place leading up to the election – rather than the incumbent, Dilma Rousseff who retained 41.6%.
According to Craig Botham, emerging markets economist at Schroders, Neves’ performance is at least in part attributable to “dismal” showings in the televised debates by Silva.
“The implications for the rest of the race, and the Brazilian economy, are ambiguous. While Neves has stronger reform credentials than Marina, polls up to this date have consistently shown his defeat in a second round run off with Dilma,” he said on Monday.
“A problem Neves faces is the ability of Dilma’s campaign to portray him as a rich playboy, out of touch with the needs of the average Brazilian. This makes it doubtful whether Silva supporters will automatically transfer their support. One encouraging point here is the stronger-than-expected performance of Neves’ PSDB (Brazilian Social Democracy Party) in the northeast of Brazil – typically a stronghold of Dilma’s PT (the Workers' party). It remains to be seen whether Marina will formally endorse Neves; without this, it is difficult to foresee his victory” he added.
The second point to note is that even if Neves wins, there are no guarantees that he will be able to turn Brazil around.
Head of research at Ashmore, Jan Dehn, said Brazil faces three major challenges: the lack of a credible economic team, the need for fiscal adjustment and reform to reduce the bloated state sector, especially in credit.
“Compared to Dilma, Neves would deliver the first two but it is unlikely, in our view, that he would have the votes to significantly change Brazil’s current status as ‘the France of South America’.
“Aside from the usual cyclical ups and downs, a sustained recovery in Brazil is unlikely until after the election and only if the government changes its economic team and begins to address the economy’s cyclical and structural problems.”
Anna Stupnytska, global economist at Fidelity Worldwide Investment, agreed adding that while Neves’ strong pro-business stance would likely be welcomed by investors, giving Brazilian companies the reform and support they badly need, “Brazil has a long way to go in terms of structural reform.”
But, she added: “Neves’ significant political footprint would likely be helpful in building a government committed to this change.
Where to from here?
According to Henderson’s head of emerging market credit, Steve Drew, a ‘Neves win’ would initially lead to risk-on sentiment in the markets, while a ‘Dilma win’ would do the opposite because many would assume that the hoped-for reforms would be off the table.
But, he added: “even the risk-on mood may be temporary as the reality bites of how Brazil can re-engineer growth in a faltering economy. While it is likely that, in the case of a ‘Dilma win’, Brazil’s sovereign credit rating could be downgraded to junk within 12-18 months, a ‘Neves win’ may only push the downgrade further down the line as growth projections for Brazil for either candidate are not great enough for a country fighting inflation to escape a downgrade.”
For Drew, In the case of a ‘Neves win’, the initial risk-on reaction would create investment opportunities, the best of which will likely be found in liquid instruments — taking a view on the appreciation in the currency or short-dated local real bonds. The price of Brazil’s external debt would also rally as credit spreads would contract.”
He added: “From a risk/reward stance, we believe Brazil should remain an underweight position for the foreseeable future. There will be times to go long the market, but it should happen on an opportunistic and tactical basis.”
The second round of elections is on 26 October, until the presidency is decided, it is likely to remain a choppy ride.
