Strategy Note /

Brazil: Bolsanaro’s better-than-expected vote takes election to 2nd round

  • Incumbent Bolsonaro scored 43% vs pre-election polls of 31-41; run-off with Lula (48% actual vs 44-50% polls) on 30 Oct

  • Neither candidate commands a majority in Congress; eg in lower house Rightist bloc is 36%, Centrist 31%, Leftist 27%

  • Initial reaction might be positive but both candidates promise similar fiscal policy. Brazil equities and FX still cheap

Brazil: Bolsanaro’s better-than-expected vote takes election to 2nd round
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
3 October 2022
Published byTellimer Research

Rightist incumbent President Bolosonaro scored much better than expected in the 2 October first round vote, with 43.2% compared with recent opinion polls suggesting a range of merely 31-41% support.

Leftist Lula, who scored 48.4%, in line with pre-election opinion poll support of 44-50%, remains favourite for the second-round run-off on 30 October. End-of-September opinion polls on second-round voting scenarios suggested he could win by a margin of 10-17 percentage points.

Centre-left candidate Gomes (2.6% actual versus 3.9-7.0%) and centrist candidate Tebet (4.2% versus 2.6-6.0%) both underperformed.

Brazil: Bolsonaro outperforms pre-election opinion polls

The initial reaction to the better-than-expected performance by Bolsonaro may be positive, given lingering suspicion of market-unfriendly policies under a Lula presidency, particularly for state-owned oil company Petrobras.

However, the lesson of Lula’s previous stint was that his leftist politics did not inhibit the positive performance of the equity market and the lesson of Bolsonaro’s term is that he is willing to sacrifice fiscal prudence and structural reform for populist gain. The main short-term risk remains how orderly a fashion the loser concedes, rather than a pivot in fiscal policy.

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

The main medium-term risk remains how easily any winning candidate can manage their legislative agenda through a Congress that is highly fragmented. Neither presidential candidate commands a majority in Congress;

  • Chamber of Deputies (lower house): Rightist bloc of three parties has 36% of seats, Centrist bloc of four parties has 31%, and Leftist bloc of 5 parties has 27%,

  • Senate (upper house): Rightist bloc 28%, Centrist 46%, Leftist 26%.

Brazil's highly fragmented Congress

Brazil outperforming but still cheap

Brazil equities (IBOV Index) and FX rate are year to date up 8% and 3%, respectively. This compares with MSCI EM down 27% ytd.

But they remain cheap versus history, particularly in comparison with large emerging market peers:

  • Trailing PB of 1.6x (for 25% ROE) is at almost a 20% discount to the five-year median,

  • Forward PE is 5.6x (for 14% consensus earnings growth and 9.5% dividend yield in 2022f) is at almost a 50% discount to the five-year median,

  • Over 20% appreciation in spot FX rate if the real effective exchange rate reverts to the 10-year median.

Brazil equities PB on a 20% discount to 5-year median

Brazil cheaper versus history than most large EM peers

Brazil FX rate: 20% upside if REER reverts to 10-year median

Next key dates: 11, 27, 30 October

Before the second round of the election on 30 October, two key dates are 11 October for the next inflation print (8.73% was the last) and 27 October for the next central bank meeting (the policy rate is 13.75%). The real interest rate is currently a very credible positive 5.0%

Brazil: Credible monetary policy with high positive real rate (ie ahead of inflation curve)