Strategy Note /

Bolsonaro unites Brazil opposition

  • Former presidents – leftist Lula and centrist Cardoso – unite to oppose rightist Bolsonaro's October 2022 re-election

  • Lula's political resurrection compounds Bolsonaro's popularity hit from Covid-19 mismanagement and stimulus tapering

  • Lula leads Bolsanaro by almost 20pp in latest opinion polls; equities performed well during leftist Lula's presidency

Bolsonaro unites Brazil opposition
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
23 May 2021
Published byTellimer Research

In Brazil, the last time that leftist Luiz Inacio Lula da Silva and centrist Fernando Henrique Cardoso shared a united cause it was in opposition to the military dictatorship of 1964 to 1985. On 21 May, they appear to have reunited in their opposition to incumbent far-right President Bolsonaro (who, incidentally, in 2019, reinstated the commemoration of the 1964 coup).

With the next general election due by October 2022, and given the dashed hopes for structural reform and the cheap valuation of the equity market relative to history, this should not be a cause for alarm. (Brazil is about 5% of the MSCI EM equity index).

The political resurrection of Lula – following a favourable legal ruling in March 2021 against his prior disqualification for running for office – and this unification of diverse parts of the opposition are compounding the challenges facing Bolsonaro, who is already suffering the fallout from mismanagement of the Covid-19 crisis and the tapering of the fiscal stimulus of last year. Bolsonaro's net disapproval rating and the lead of Lula over Bolsonaro are each about 20 percentage points.

Bolsonaro suffering his worst opinion poll ratings

Lula politically resurrected and leads Bolsonaro in polls

There is no immediate threat to the ruling coalition in the highly fragmented lower house of the Congress. However, the interest and effectiveness of the Bolonaro government in reform has already waned.

Bolsonaro's coalition government (of six parties, none of which are directly controlled by Bolsonaro) has merely 29.6% and relies on 37.2% of confidence and supply from a group of 7 parties.

Cardoso's Social Democracy Party control 6.4% and their potential exit from the confidence and supply group would not, on its own, break the government in the legislature.

Lula's Workers' Party is the largest opposition party with 10.1%.

Bolsonaro is no longer a reform hope anyway

In response to the higher probability of a swing to the left at the next election (Lula was also leading opinion polls before his disqualification from the 2018 election), five factors argue against the sort of fears evident in LatAm peers (eg Chile, Colombia, Peru).

  1. Amid a chaotic response to Covid-19 and with re-election already on his mind, right-wing incumbent President Jair Bolsonaro has moved away from championing structural reform and liberalisation policies (undermining finance minister Guedes and interfering in the management of Petrobras).

  2. Congress is already highly fragmented and this would hinder even the most sincere reform efforts by the executive branch (there are over 25 parties in total and the largest party within the governing coalition has merely 8% and 15% of seats in the lower and upper houses, respectively).

  3. During Lula's tenure in 2003-10, the commodities super-cycle outweighed concerns over the socialist manifesto (if not all the policies and actions) of the Workers' Party he led.

  4. Commodities are once again a tailwind for Brazil, which could overwhelm poor politics: eg products related to soybean, iron and petroleum, each of which drive c15% of exports, and the prices of these commodities are up about 6%, 16%, and 30%, respectively, year to date.

  5. Brazil equities, measured by the Ibovespa Brasil Sao Paulo Stock Exchange Index, are flat ytd in US$ total return terms, worse than most of large EM excluding China (MSCI EM is up 3.5%). This is flattered by the performance of the largest constituent, Iron Ore exporter Vale, which is about 12% of Ibov and 20% of MSCI Brazil. Vale is up about 30%. A weighted average of the two largest Banks (Itau and Bradesco, which account for about 12% of the index) is down over 4%. Forward PE of the index is 10.3x, a 20% discount to the five-year median – the largest discount in large EM excluding South Africa – and even Vale, with a PE of 4.5x, is on a 25% discount.

Politics is already a headwind and if the commodities tailwind persists then the precedent of his last tenure suggests Lula's return should not be so feared.

Lula's 'socialism' did not stand in the way of a commodities-driven rally in Brazil equities last time round in 2003-10

Related reading

Political risk

Democracy disappoints in LatAm, May 2021

The Brazilian blowout in equities in 10 charts, April 2021

Brazil's Lula returns; 5 reasons why this should not be feared, March 2021

Petrobras-induced sell-off makes Brazil valuations appealing, February 2021

Brazil: Congress leaders save Bolsonaro but may not help reform, February 2021


Commodity food prices scorch higher in April, May 2021

Commodity price beneficiaries in EM, October 2020