By Jorge Amato
Head - Latin America Investment Strategy
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Brazil’s new president may be a populist strongman, but we believe the country’s financial markets remain attractive
Brazil has become the latest country to succumb to the appeal of populism. Jair Bolsonaro – its new strongman President – has been likened to Donald Trump. Indeed, his US counterpart was among the first to phone in – and, of course, tweet – his congratulations. Bolsonaro’s strident rhetoric has often gone beyond that of Donald Trump. Aside from his well-known admiration for his country’s former military dictatorship, he campaigned under the “America First”-like slogan of “Brazil before everything,” and has uncompromising positions on law and order, many social issues, and the United Nations. Should investors be concerned?
Financial markets not only anticipated but also welcomed Bolsonaro’s victory. The new President recently announced he would make Paulo Guedes his Minister of Finance. While as yet unconfirmed, the appointment of the Chicago-trained economist would likely well received by investors. Among the market-friendly policies he may pursue are privatizations to cut public debt, capitalization of the creaking national pension system, ongoing fiscal spending limits, deeper labor reforms, a tax on dividends, a freely floating exchange rate, and an independent central bank. It should be noted that some of this agenda will require Bolsonaro’s party to work with center-right groupings in Congress.
We share the markets’ view that Bolsonaro’s victory was a better outcome than if his leftist opponent had won. MSCI’s index of Brazilian equities rallied 12% between 3 and 26 October, bucking the 9% drop in MSCI global equities over the same period. Brazil’s currency also strengthened 6.7% against the dollar, while Brazilian rates fell 1%. Can this strength continue? We believe that accelerating local economic growth in the next two years, low equity valuations, and improving company earnings could drive equities higher. However, this would likely also require support from a recovery in equities globally. For the currency, possible further appreciation from 3.7 to 3.4-3.5 against the dollar may occur, but we would regard that as an overshoot.
Going by his campaign record, President Bolsonaro is likely to generate some controversial headlines. However, we urge investors to keep faith with Brazilian assets for now. Citi Private Bank’s Global Investment Committee remains overweight the country’s equities and fixed income. Reforms may not follow overnight, but may well do so in the medium term. In the meantime, valuations look attractive. As we have learnt elsewhere, strongman leaders are not incompatible with robust returns.