Brazil's upcoming presidential election is too close to call, says with volatility expected to persist until the final outcome is known.

October 2014

Key points

  • Prospect of a new business-friendly president had boosted Brazilian equities until late August.
  • But Silva underperformed in a televised debate and her poll ratings dropped.
  • Brazilian market fell back as political uncertainty increased.
  • Volatility is likely to persist until the election outcome is clear.

Time to be specific

As investors in emerging market equities become more discerning, there has been a growing focus on the outlook for individual markets. This is perhaps no surprise: over the long term, country factors account for around 40% of the returns generated by the asset class. In recent times political change has been a recurring theme. For example, the election of market-friendly candidates has proved to be a catalyst for re-rating as recently demonstrated in Mexico, India and Indonesia.

Brazil in recession

Dilma Rousseff has been president of Brazil since 2010, overseeing a challenging period for the economy. With the country now technically in recession, her approval ratings hit a low in 2013. This was reflected in street protests triggered by rises in the cost of living and the poor state of public services. Despite an improvement in ratings towards the end of 2013, her fortunes have ebbed and flowed so far this year. 

With Brazil representing 11.85% per cent of the MSCI Emerging Markets Index, the presidential election is developing into a high-stakes game.

Jerome Nunan

Investment Director, Multi-Asset

Fluctuating share prices

Brazilian share prices have also fluctuated sharply in 2014, partly as a result of political uncertainty. Some politically-sensitive companies, such as Petrobras, have been especially volatile. The market rallied strongly from mid-March through to the end of August, anticipating that Rousseff’s low approval ratings would result in her defeat and the election of a more business-friendly presidential candidate. 

From glitter to jitter

Latterly this candidate has been Marina Silva, who was elected leader of the Socialist Party following the death of Eduardo Campos in a plane crash. Yet the result of the first round vote, due to take place on 5th October, is too close to call. The market has sold off sharply in recent days. And the sell-off gathered pace in the final week before polling after a televised debate in which Silva fared poorly.

Playing the re-rating game

Many investors believe that the stakes for Brazil are high, but it would be misleading to read too much into events in Mexico. There, share prices have been aided by a strengthening US economy. The Brazilian market, in contrast, has been hurt by signs of slower Chinese economic growth and weaker commodity prices. Nevertheless, with Mexican president Pena Nieto driving through economic reform – notably with respect to the oil and gas industry – the Mexican market has re-rated and now trades on 18x forecast 2015 earnings. The reaction of the Indian and Indonesian markets to the election of Narendra Modi and Joko Widodo respectively has been similar. Both heavily promoted reform agendas during their campaigns. In sharp contrast, the Brazilian market is stuck on a forward p/e multiple of just 11. 

Hold tight

With Brazil representing 11.85% of the MSCI Emerging Markets Index, the presidential election is developing into a high-stakes game. If the outlook does not become clearer after the first round results, we can expect a further three weeks of volatility until 26th October – when a definitive, run-off between the top two candidates takes place. For investors, it could be a roller coaster ride.

 

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