Brazil handed Wall Street a pleasant surprise Sunday night, when the country’s first-round Presidential runoff resulted in victory for the incumbent, the socialist party’s Dilma Rousseff, and once long-shot center-right candidate Aecio Neves.
The real is surging against the dollar and its stock market, the Bovespa, is up 8%.
The country’s exchange traded fund — a security that trades a basket of Brazil’s stocks and its currency as a single entity — is up 10% in premarket trading.
It’s all because of center-right candidate Aecio Neves — this is why Wall Street loves him.
He’s the market friendly candidate who, according to his platform, will tighten Brazil’s belt and focus on bringing investment back to the country.
“Mr Neves hopes to raise the investment GDP ratio to 24% by 2018 from current levels of less than 18%. More critically, he has promised to raise infrastructure spending by opening the sector to private players and allowing the returns on those investments to be set by the market (rather than by the government),” wrote Societe General in a note this morning. “As we have previously stated, investment decline has been the single most important factor behind the recessions and generally low growth seen over past three years. The key factor to revive investment in the short run remains investor confidence. “
Right now the Brazilian economy is going through an ugly reversal. Once the darling of emerging markets under former President Luis Inacio Lula da Silva’s administration, its stock market has fallen 22% since current President Dilma Rousseff took power in 2011.
Morgan Stanley sees the country’s GDP going negative in the first half of 2015, contracting -0.4%. Inflation is high and climbing, corporate margins are thin, and tough reforms — like cutting fat from welfare programs that have pulled many Brazilians out of poverty — are necessary.
In fact the reforms are so tough that some believe a Neves victory is far from a cure-all.
But it’s better than what markets expected — a contest between Rousseff and Marina Silva, a former environmental activist who ran alongside Eduardo Campos. She was to be his vice president until he died in a tragic plane crash this summer.
There was a surge of support for Silva after Campos died, and it was so strong that polls had her beating Neves for the number two spot until just before the election.
This, the markets did not like at all. Last week Brazil got absolutely pummelled.
Of course, this isn’t over. Over the next three weeks Dilma Rousseff will use her considerable political power as an incumbent — and the well-liked Lula — to out-campaign Neves.
The vote between Neves and Rousseff will be held on October 26th.