Brazil Assets Set to Outperform as Lula, Bolsonaro Go to Runoff

Edwin Gutierrez, the head of emerging-market sovereign debt at abrdn in London:

“Bolsonaro still has a chance, but this is still Lula’s election to win. But more importantly, Congress definitely broke far more for the right than expected. With right-wing parties being a bigger block than expected, this will definitely handcuff Lula’s tax and spend agenda”

“The margin of victory in the runoff should still be wide enough to ‘disprove’ any fraud alleged by Bolsonaro. That said, this is not a dead cert, so this risk remains non-zero”

Thierry Wizman, a currency and interest-rate strategist at Macquarie Capital in New York:

“The market may applaud the prospect that even if Lula wins the second round on Oct. 30, he is unlikely to have as much support in Congress and among the governors as he would have liked. This means that his administration may lean more moderate”

“But with much of the world entering recession and commodity prices set to define further, it is difficult to stay optimistic. And attention should shift to the condition of the global economy and Brazil’s terms of trade, which will get worse. For this reason, I would use a rally to reduce exposure to Brazil”

Natalia Gurushina, an emerging markets fixed-income economist at Van Eck Associates Corp:

“The first-round results are more market-friendly than the pre-election polls suggested. The margin is very slim, and this means that the uncertainty about the presidential election outcome will persist until the very last moment. Brazil’s improving fundamentals — especially disinflation and a somewhat better growth outlook — can boost Bolsonaro’s chances.”

Malcolm Dorson, a portfolio manager at Mirae Asset Global Investments in New York:

Jared Lou, a portfolio manager at William Blair Investment Management LLC:

“Although we expected the polls to under-represent the Bolsonaro vote, this is a tighter race than we thought it would be. Lula will have to work harder to attract the center. This also implies that if Lula does eventually win, we won’t have as strong of a mandate as many had thought he would have”

“Ultimately, this bodes well for Brazilian assets. Although the market was pricing in a Lula victory, the probability of a radical left leaning government has decreased. What would be best for Brazilian risky assets is policy continuity”

Katrina Butt, a senior Latin America Economist at AllianceBernstein in New York:

“As results were closer than most polls ahead of the first-round vote were indicating, Brazilian assets should rally. However, there’s still significant uncertainty going into the second round, including a tail risk of social unrest and calls of election fraud if Bolsonaro loses in the runoff”

Jeff Grills, head of emerging markets debt at Aegon Asset Management in Chicago:

“There might be a brief relief rally, but Brazilian assets will be mostly influenced by global markets. The market focus will now shift to the polls again and how expectations evolve between Lula and Bolsonaro”

“Markets will be hoping for more signs of a pause in the hiking cycle by developed-market central banks, which I don’t believe they will get, so risk assets are likely to remain vulnerable”

Dario Valdizan, head of buy-side research at Credicorp Capital Asset Management in Lima:

Tighter-than-expected race “should translate into a more constructive view for the country”

Lula “will need to provide more clarity regarding social expenditure, fiscal discipline, and the role of the BNDES and state-run firms”

Gustavo Pessoa, a founding partner at hedge fund operator Legacy Capital in Sao Paulo:

Brazilian assets should react positively as Lula will need to move toward the center and signal a more moderate plan, possibly tapping former central bank chief Henrique Meirelles for his economic team

Edward Moya, senior market analyst at Oanda:

Alberto Ramos, chief Latin American economist at Goldman Sachs Group Inc:

“Brazilian assets are expected to open (slightly) up given the likelihood of a more competitive race. Key for market direction and asset prices will be the post first-round runoff polls”

“We are bound for a competitive and likely also very polarized presidential election runoff”

Andres Abadia, chief Latin America economist at Pantheon Macroeconomics:

“The key issue now is how the center and center-left of the political spectrum will position themselves in the second round”

“In markets, we think external conditions will remain the key near-term driver, as the race is very tight”

“The good news is that Brazilian markets have performed relatively well in recent months, despite the presidential race, suggesting that both candidates are considered business- and market-friendly”