By Jorge Amato
Head - Latin America Investment Strategy
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Brazil’s turbulent election campaign has unnerved investors. But there is a case for looking beyond the drama.
Even by Latin American standards, Brazil’s general election campaign has been fiery and unpredictable. The current frontrunner in the presidential race – Jair Bolsonaro – is a far right-wing populist and admirer of the country’s former military dictatorship. His popularity among voters swelled further after he survived an assassination attempt at a recent rally. Fernando Haddad – Bolsonaro’s likely opponent in the election’s second round – only entered the contest earlier this month after his leftist party’s previous candidate – ex-President Lula – was banned from running. Polls indicate that a run-off between Bolsonaro and Haddad could be extremely tight.
For all the campaign’s drama, the eventual result will probably not produce major upheaval in Brazil. Neither of the two main presidential candidates’ parties are likely to win control of Congress and thus be able impose drastic unwanted changes. We will be watching the new administration closely to see if it will tackle much-needed pension reforms, maintain central bank independence, and improve fiscal discipline. In the meantime, Brazil’s economy continues to grow below its potential rate. The Bloomberg consensus forecast is for GDP growth of 1.6% in 2018, and 2.5% the next two years.
Despite Brazil’s electoral uncertainty and the turmoil in emerging markets more generally, we remain constructive on Brazilian assets. Corporate earnings remain healthy and the equity market is up 2% year-to-date in local currency terms. Five-year Brazil credit default swap spreads are trading close to 300 basis points, too wide relative to the real credit event risk, in our view. We are therefore staying positive on equities, external debt, and local rates, and believe there may be opportunities on offer.
Clients can read our full thoughts on these markets in Latin America Investment Strategy | Brazil Elections - Preparing for Round 1.