Brazil election: Lula set to reap “economic dividend”

Following leftist Luiz Inácio Lula’s defeat of far-rightist incumbent, Jair Bolsonaro in the second-round presidential election on 30 October, Xavier Hovasse, Head of Emerging Equities at Carmignac considers the implication for international investors:

While the margin of victory is tighter than that implied by pre-election opinion polls, a Lula victory was expected. The defeated incumbent Jair Bolsonaro looks not to be contesting the result as feared before the second-round run-off. Assuming that an orderly transition of power unfolds, we see this result as market friendly as it should lead to lower the political risk premium on deeply undervalued Brazilian assets.

We are also comforted by regional elections results, with a center and right-wing majority in the Congress and by Lula’s choice for vice president, Geraldo Alckmin coming from a center-right party. Indeed, the Congress is a powerful institution in Brazil and will likely block any attempt by the new elected President Lula to walk back the privatization of big companies, as he did in the past.

The next key thing to watch would be the nomination of the finance minister, which will give a final confirmation on the orthodoxy of the monetary policies going forward.

On the macroeconomic front, things are also looking good. Improved terms of trade, thanks to higher commodity prices, including agricultural commodities, where Brazil is leading global exports for a number of products, including sugar, soy, coffee or iron ore bode well for economic growth.

Inflation is also moving in the right direction. After having peaked at 12.1% in April, Brazil’s inflation rate has fallen back to 7.2%. That has allowed the central bank to pause interest rate rises, and the market is pricing in a cycle of rate cuts going forward. In this case, Lula would reap the economic dividend from Brazil having been the first major economy to seriously move against inflation using aggressive monetary policy last year.