Brazil on even keel despite election uncertainty

Although Brazilian presidential hopeful Dilma Rousseff failed to win an outright victory in last weekend's election, outgoing President Luiz Inácio Lula da Silva's succession plans are still on track, and investors have no reason to be concerned, according to Urban Larson, director, emerging equities and Latin America specialist at F&C Investments.

"Lula is so popular that it is highly likely his chosen successor will win," said Larson. "Investors are neither particularly excited nor particularly worried about Dilma. It remains probable that Lula will still be involved behind the scenes. Nevertheless if Dilma's opponent José Serra were to win (not likely), this would be received positively by the markets. At a minimum the fact that Dilma did not win in the first round while the opposition did well in several key state elections makes it more likely that she will need to govern from the centre." 

Brazil - which represents two-thirds of the Latin American market index - has developed significantly since Lula's first election in 2002. "Brazil used to finance itself on the overnight credit markets," said Larson. "Now it is an international creditor and is issuing 20 or 30-year government bonds. Inflation is now entrenched in the 4-5% range."   All this may seem an unlikely achievement for the leader of the Workers' Party. However, Larson said: "Lula realised in 2002 that he wasn't going to win unless he stopped frightening the middle classes. He has delivered economic stability and social mobility, lifting a lot of Brazilians out of poverty, which in turn drives domestic demand."   Many people are unaware of how domestically driven the Brazilian economy is, said Larson. "Commodity strength keeps the Brazilian currency strong, but commodities are more important in the benchmark Bovespa index (roughly 50% of the index is commodity stocks) than in the economy. Commodity exports are only about 8% of GDP."  

Larson said the domestic demand story is one of the things that makes Brazil such an exciting market, though he conceded it would not be immune to a general rise in risk aversion globally. "Eleven million Brazilians will go on an airplane for the first time this year," he said. "Brazil did not have a financial crisis along with the developed world: it is underleveraged and domestic demand is strong. The risks to Brazil - and to Latin American markets as a whole - are mainly external."