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Over the past months, emerging market (EM) assets were hit primarily by the trade war saga, which triggered an exodus as they flocked to safer assets. Brazil was also part of the flock, however the higher levels of the sell-off were and are conditioned by the upcoming general elections.
On the 7th of October 2018, Brazil will go to the polls to elect its new President. Brazil is always, rightly so, given strong importance in such important events given that it is considered the largest economy in EM within the Latam region. In fact, Brazil always features as one of the largest countries by exposures in leading EM (equity and credit) indices.
Over the years, Brazil has experienced a wave of persistent turbulence in its economy, with the momentum pointing towards the downside, primarily due to the huge lingering corruption sage which proved to be a determining factor in pushing the economy into a recession for a prolonged period; from 2014 till early 2017. Furthermore, repercussions emanating from political errors in 2016 led to the impeachment of Rousseff, who was replaced by back than vice-President Temer.
The two-round system
The President and the Vice President of Brazil are elected using the two-round system. If the most-voted candidate takes more than 50% of the overall vote, he or she is declared elected. If the 50% threshold is not met by any candidate, a second round of voting is held on the last Sunday in October (in this instance, 28 October 2018). In the second round, only the two most-voted candidates from the first round may participate. The winners of the second round are elected President and Vice President of Brazil.
The two main frontrunners are Jair Bolsonaro from the PSL party and now Fernando Haddad from the PT party who replaced the popular amongst voters Lula da Silva who was imprisoned for 12 years for corruption scandals. His candidacy was rejected by the electoral court in accordance with the clean state law. To date Bolsonaro is leading by 28 percent with political analysts stating that the stabbing attack held on the 6th of September 2018 while campaigning helped him in gaining further popularity. Haddad is at 16 percent following his plea that he will be the new Lula, the populist president which when in office gained popularity by putting into place initiatives to help out the lower class.
As with all elections, a sense of uncertainty is always prevalent. Brazil is no exception. The recent market reaction is pricing-in both the possible support to Lula’s replacement, who, according to the latest polls, appears to be struggling and to Bolsonaro. With the latter, markets fear that his political views are not the ideal for an economy, which inevitably needs to focus on an economic resurgence.
The privatization of state owned companies, including Petrobras, seems to be a communal stance amongst the majority of parties, while others are selective in terms of privatisation. What is definite is the common stance, and that is that strategic assets need to be preserved.
We are of the view that we could see further volatility going forward both in the Brazilian currency and Brazilian assets. That said, we believe that the possible volatility might be overdone and in such instances it does give the opportunity for investors to dip-in at very attractive levels. As mentioned earlier, Brazil is and will remain a very important geographical area within the Latam area and hence will continue to be a large contributor to overall EM performance. Surely, its contribution towards Latam GDP growth will always be important and any political turbulence will not be unnoticed.
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