Investment strategy
October 3, 2022

Brazil heads for presidential run-off poll

October 3, 2022
Jorge Amato
Head of Latin America Investment Strategy
SUMMARY

Global financial conditions are tightening and commodity prices are softening, presenting potential headwinds for Brazil, as the country heads for a run-off presidential poll on October 30th.


  • Lula and Bolsonaro are headed for a 2nd round vote on 30 October. With nearly 100% of the votes counted Lula led the results with 48.4% while Bolsonaro had 43.2% of the votes. Lula would have needed over 50% of the votes for an outright win on Sunday (October 2, 2022). A run-off led by Lula was predicted by the most recent polls - some even suggested a 1st round victory. However, this result is somewhat of a surprise given that they were showing Bolsonaro with around 35% of voting intentions.
  • The remaining 8.2% of the valid votes for the president were split among the next four candidates, highlighting the degree to which this was a two-horse race.
  • Brazilians also voted for 513 lower house seats and 27 senators (1/3 of the 81-member upper house). Given Brazil’s complex legislative power dynamics - a center coalition with majority control - the results of these congressional seats deserve very close attention, if not as much as the main presidential vote as they will condition the scope of action of either presidential candidate.
  • Both Lula and Bolsonaro propose to govern under their own brand of populism to fulfill their promises to voters. But they each offer very different paths and strategies to tackle social and economic challenges. Whoever wins, investors can expect at least one common denominator: government spending and fiscal stability will continue to dominate the legislative debate. The lack of full control or support from congress is also all but guaranteed.
  • A risk factor to consider when the 2nd round plays out is that Bolsonaro has repeatedly suggested the election results could be rigged. The much narrower margin relative to the polls could increasingly embolden Bolsonaro to attempt to reject the results if he loses.
  • Investors have benefited from the fact that this election presented little in terms of surprises, since both Lula and Bolsonaro were “known knowns” in terms of their personalities and views. Brazil’s currency and equity market have outperformed (+2.86% and +1.92%, respectively, year-to-date in USD terms) every other major market in the world.
  • Meanwhile, the economy has grown more than forecast - despite an uber aggressive central bank hiking rates to 13.75% - unemployment is off the highs, inflation is decelerating, and external accounts are supported by a strong export sector.
  • Polls give Lula the advantage for the run-off. Investors can expect a potentially volatile October as political rhetoric is likely to remain highly polarizing and global markets deal with 3Q22 earnings in the coming weeks.

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