Amundi - Comment on the Elections in Brazil Mittwoch, 05. Oktober 2022 - 11:40

Please find below a short comment on the elections in Brazil from Amundi.

Sergei Strigo, Co-Head of Emerging Markets Fixed Income

The first round result was positive due to a much narrower gap between Lula and Bolsonaro than markets anticipated. Bolsonaro’s allies in the Senate and state elections did much better than expected and increased the number of Congress seats.

While the central scenario remains a victory for Lula on 30 October, most likely he will have to move further to the center, and some of his more extreme policies might be more difficult to pass in the Congress. As such, we are constructive on Brazilian assets, especially in the FX and local-currency bonds.

Once the election risk is behind us, we believe that Brazil fixed income should perform well due to a variety of factors, including:

• Relatively high carry on BRL and rates;
• Positive real rates, which is not the case for most other EM;
• Brazil is probably the only EM country where we are seeing a peak in rates and in inflation;
• Inflation is expected to be in single digits in 2022 and converge to the CB target by 2023-24;
• CB has stopped hiking rates; and
• GDP growth has been unexpectedly robust in 2022 thus far.

Overall, prospects are brighter for BRL and rates, even though the market is pricing in around 300bp of rate cuts by end-2023. BRL has been one of the best performing EM FX this year, but with a high carry – currently at 13.75% -- it remains worth being invested into it. It could appreciate further, towards 5 against the USD, or even below.

On hard-currency bonds, Brazil CDS around 300bp is probably a fair value. We see some opportunities in corporates.

Patrice Lemonnier, Head of EM Equity

On equities, we expect the Brazilian equity market to rise under any final election outcome due to different factors. Firstly, we believe the fiscal situation -- a key element of Brazil’s financial stability -- to be neither good nor catastrophic under both outcomes. If Lula wins, probably he will not get enough support in Congress to pass all the social spending he wishes for. Secondly, Brazil’s CB started its tightening cycle one year before the Fed and should be among the very first countries around the world to ease its monetary policy. This should help growth to resume. Valuations are also extremely cheap. Brazil is insulated from geopolitical turmoil, is self-sufficient energy-wise, and should benefit in the long run from its agro-power status.

However, Brazilian equities would probably rise more if Bolsonaro win, as state-owned enterprises and banks would fare better. This is testified by Lula’s For instance, Lula’s announcement that he wants fuels produced by Petrobras being sold at ‘cost plus’, instead of at international prices. At the sector level, we favour consumer discretionary and corporates levered to declining long-term interest rates, such as infrastructure and real estate.