Despite the head start given by Brazil’s thriving economy, the country’s ruling party candidate Dilma Rousseff, was unable to win Brazil’s presidential elections on October 3 by a sufficient majority to avoid a runoff scheduled for October 31. Rousseff won 47% of the ballots, falling short of the required 50% plus one required to put her past the post ahead of her main challenger, the former governor of Sao Paulo, Jose Serra.
Rousseff, who has something of a worrying reputation as an interventionist in economic matters, remains the odds on favourite to become the country’s new President.
Rousseff had been expected by many to win outright. A Reuters report just before the election pointed out that Serra had managed to turn a 10 percentage point lead in the polls, dating from February, into a 20 point lead for Rousseff in the run up to the election. The general view throughout the campaign has been that Serra was going to struggle against the impetus given to Rousseff’s campaign by the huge personal popularity enjoyed by Brazil’s outgoing President, Luiz Inacio Lula da Silva.
All in all, the global investment community seems fairly relaxed over the probable outcome. The Association of Investment Companies (AIC) recently sampled the views of a handful of fund managers in the region. The AIC points out that the Brazilian economy has been performing pretty well and has rewarded fund managers with a deep understanding the Brazilian markets. The sector veteran fund, BlackRock Latin America, outperformed the investment company average over both the short and the long term, demonstrating the attractiveness of the region.
Sebastian Luparia, manager of JPMorgan Brazil Investment Trust calls Brazil the poster child for emerging markets. He told the AIC: “The combination of fiscal discipline and windfall commodity revenues over the last decade allowed Brazil to reduce external debt and build reserves. This meant it entered the financial crisis in better shape than at any time in living memory and gave it the policy flexibility to respond to the downturn.”
The AIC cites the confidence Will Landers, manager of BlackRock Latin America Investment Trust, has in Brazil’s domestic growth. ““We believe Brazil offers the best combination of a strong top-down story and the most attractive valuations from a bottom-up perspective. There has been significant growth in Brazil’s middle class, unleashing unmet, pent-up demand for all kinds of products and goods - from white goods to TVs to cars to new apartments.”
Devan Kaloo, co-manager of Aberdeen Latin American Income Fund compares Brazil favourably with many developed countries. “The country’s budget deficit is around 3.4% of GDP compared to between 9 to 11% in countries in the Eurozone, Japan, UK and US,” he says.
One risk to Brazil, and to other emerging markets, is that capital flows from the economic stimulus pumped into their economies by the likes of the US, the UK and the major Euro zone economies will pour in and drive a new asset bubble. However, in Luparia’s view emerging market central banks are well aware of this and the risk of bubbles is over-hyped, whoever wins the election.
BlackRock’s Lander told The AIC:
“Latin America has traditionally been considered a high risk equity market, caught in the “boom or bust” syndrome of a couple of good years followed by a hard crash. Some feared that the 2008/09 US-led credit crisis would cause such a bust following a prolonged boom period. The reality is that the region was able to prove its resilience during the heights of the crisis, showing that years of macroeconomic reforms had left a solid fiscal position, disciplined monetary policy, high levels of liquidity and strong corporate and banking sectors.”
Given the solidity of Brazil’s position, none of the fund managers expect the runoff elections on October 31 to generate any shocks or surprises as far as the economy is concerned. In the words of Lander:
“We do not expect the upcoming elections to have any impact on our investments or potential new investments - both leading candidates have stated their intention to give continuity to Brazil's economic programme that was started in 1994 as the Real Plan. This plan has three main pillars - running a primary surplus at the federal level, inflation targeted as the only goal for the Central Bank and a free trading currency that can absorb short-term shocks. Overall, the continuity of this economic programme encourages investment, and thus ensures continued economic growth.”
With strong momentum in domestic spending, all the fund managers regard Brazil as far more than a commodity play as far as investment is concerned. Retailers, banks and home builders all have a good story to tell and whoever wins on October 31 will simply need to keep the ship of state pointing in precisely the direction it is already headed…
Further reading on emerging markets
- IPOs in Emerging Markets, by Janusz Brzeszczynski
- How to Manage Emerging Market Risks with Third Party Insurance, by Rod Morris
- Costs and Benefits of Accounting-Based Regulation in Emerging Capital Markets, by Wang Jiwei
- Is the West mispricing emerging market assets? Blog post by Anthony Harrington
Tags: Brazil , Brazil elections , commodities , Dilma Rousseff , domestic growth , fund managers , investment , Jose Serra , President Luiz Inacio Lula da Silva