Strategy Note /

Brazil: Bolsonaro buys votes and alienates investors

  • Another social welfare plan (Auxilio Brasil) pressures c7% fiscal deficit and c90% debt forecasts over 2021-22

  • While this spooked investors it has helped Bolsonaro close some of the wide opinion poll gap with left-of-centre Lula

  • Brazil equities are cheap: counter-intuitively, high prior Covid infection and a Lula win may help the investment case

Brazil: Bolsonaro buys votes and alienates investors
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
1 November 2021
Published byTellimer Research

Brazil President Bolsonaro's new social welfare programme, under the pretext of combatting Covid-related hardship, is spooking investors but may be winning him back votes. The PoderData opinion poll, published on 27 October, shows that Bolsonaro has increased his support by 7pp to 37% in the last two months and narrowed the gap to former President Lula from 25pp to 15pp.

Bolsonaro cuts Lula's lead from 25pp to 15pp in 2 months

A bump in the opinion poll rating of the leading right-of-centre candidate for the October 2022 presidential election might ordinarily be a positive catalyst for investors. However, the "Auxilio Brasil" plan increases downside risks to IMF forecasts of c7% fiscal deficit and c90% gross government debt to GDP over 2021 and 2022.

The inflationary impact of the programme may also portend even greater policy rate hikes to follow the 425bps cumulative change year-to-date (not to mention a real interest rate which is negative 4%, the lowest in large EM).

Long gone are the days when the words of Finance Minister Paolo Guedes carried any weight. Bolsonaro's increasingly desperate effort to secure re-election is possibly the largest investment risk.

So far this year, foreigners have remained net buyers of Brazil equities.

We have made the case before that in the aftermath of the blowout in Brazil under Bolsonaro, a Lula presidency should not be feared and the likelihood of Bolsonaro finding enough cause to draw the military into the front office of politics is low.

Foreigners have been net buyers of Brazil equities in 2021

Brazil equities are down 20% ytd (7% FX rate decline), a massive underperformance versus large EM peers (eg oil exporters Russia and Saudi are up c40%, India is up c25%, and China is up 6%).

Valuation multiples which have retraced all of the hope baked in after the election of Bolsonaro at the end of 2017.

A contrarian positive call on Brazil equities now rests on a number of factors:

  • A benign US dollar and yield environment (which applies to most of EM, of course);

  • Covid disruption clearing the path for growth sooner than expected (which is possible given the very high rate of prior infection, with confirmed cases over 10% of population, and the pick-up in vaccination rate, with 55% fully vaccinated);

  • In commodities, China's demand for Iron Ore (15% of exports) stabilises and food prices (Soybean, Corn, Coffee, Meat, and Sugar are collectively 35% of exports) hold up; and

  • No further destabilising populist actions by Bolsonaro for the fiscal or corporate (eg Petrobras) outlook.

Brazil valuation round-trip under Bolsonaro (1)

Brazil valuation round-trip under Bolsonaro (2)

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Brazil’s Bolsonaro mimics Trump but a coup is unlikely, September 2021

Brazil: Lula's lead over Bolsonaro widens, June 2021

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The Brazilian blowout in equities in 10 charts, April 2021

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

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