This post is also available in: Spanish
Brazilians remain polarized following this past weekend’s inconclusive presidential election that pitted far-right incumbent President Jair Bolsonaro and the left’s superstar and former president, Luiz Inácio Lula da Silva (“Lula”) of the Partido dos Trabalhadores (Workers’ Party, PT).
While many analysts expect Lula to maintain the surprisingly narrow lead he garnered for the upcoming runoff vote, markets may remain rocky even under the assumption that a Lula win has largely been priced in. The risk also remains that Bolsonaro may reject the runoff outcome, claiming electoral fraud and issues with electronic voting machines.1,2
From an economic perspective, a victorious left could be a surprisingly positive outcome, and financial markets are partially reflecting this. The Brazilian real has recently held its ground against the US dollar while many developed market currencies, including the euro and the pound sterling, got battered. Brazilian equities have strongly outperformed emerging market peers year-to-date and over one year.3 While Lula embraces many left-wing PT signature policies like transfer payments and debt-forgiveness programs, neither the business community nor the wider populace view him as a socialist firebrand—despite Bolsonaro’s attempts to paint him as such. Occasionally radical on paper, Lula’s actual policies from 2003 to 2010 tended to be pragmatic. His time as president saw an average annual gross domestic product (GDP) growth of 4.5%, public debt-to-GDP reduced by about one-third, and roughly 20 million Brazilians climb out of poverty.4
Bolsonaro, of course, had his own successes in office, perhaps most notably a mammoth plan for long-term pension reform in 2019. This is widely regarded as a major step toward consolidating Brazil’s budget deficit, which ballooned in recent years largely due to exorbitant pension costs. Until 2030, the reform is expected to produce around 800 billion reais in savings (US$155 billion at today’s exchange rate).5 Nevertheless, currently more than 90% of the budget is still being spent on mandatory payments, making substantial progress unlikely in the short term—regardless of who wins the election. The next president will also have to deal with the prospect of a faltering world economy. On the other hand, Brazil is likely to continue to benefit from high commodity prices, although it also faces risks from an escalation of the war in Ukraine as it is highly dependent on fertilizer imports. It is important to note, however, that even as a leading commodities exporter, Brazil is somewhat insulated from global economic shocks. Trade accounts for just under one-third of GDP, while household consumption contributes over 60%.6
On balance, a Lula presidency could lead to a rising deficit over the short term, which may be offset in the medium term by higher tax revenues and more private consumption. Government investment in the expansion of renewables could also increase. While Brazil is already a leading nation in hydropower production, Lula’s platform includes pledges on transitioning state-run Petrobras to be more competitive against European firms.7 A PT victory could indeed help unleash Brazil’s enormous potential in green energies, especially in times of heightened geopolitical concerns over energy security.
We do, however, expect some further volatility, either because markets may have to reprice in the event of an unexpected Bolsonaro win in the runoff, or should Lula prevail, investors will be left to digest some post-election uncertainty and evaluate his actual policies versus campaign pledges. In both cases, however, investor opportunities abound as Brazil remains a leading player in both hard and soft commodities, with a head start in green energies, and a young and still growing workforce.
WHAT ARE THE RISKS?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
1. Source: Axios, “Brazil’s Bolsonaro echoes Trump’s election fraud claims,” July 26, 2022.
2. Source: Aljazeera, “Bolsonaro’s false fraud claims involve this Brazil voting system,” September 6, 2022.
3. Source: Bloomberg, 2022.
4. Source: The Economist, “How left-wing on economics is Luiz Inácio Lula da Silva?,” September 19, 2022.
5. Source: BBC, “Brazil pensions: Victory for Jair Bolsonaro as reform passes,” October 24, 2019.
6. Source: The Global Economy, “Brazil: Trade openness,” 2020.
7. Source: Argus Media, “Lula to reposition Petrobras for energy transition,” September 14, 2022.