Last month Brazil was getting killed — its currency and stock market punished by investors who feared more of the same under another Dilma Rousseff Presidential administration.
Now the country’s turning around, and its stock market is poised to regain all its losses from the last month.
The reason is simple. Rousseff’s in trouble. At least, according to recent polls.
Three of four of Brazil’s major polls put more market-friendly candidate, Aecio Neves, slightly ahead of Rousseff (they have a +/-2 margin of error).
- Vox favours Rousseff by 1%
- Data Folha favours Neves by 2%
- Ibope favours Neves by 2%
- and Sensus favours Neves by a whopping 15%.
Neves wants to tighten monetary policy, reform Brazil’s tax system, cut government programs and encourage investment. The market loves this.
For her part, Rousseff agrees that reform is needed, but her regime is the one that presided over a massive decline in the economy’s performance over the last five years. Plus, it’s politically impossible for her to take the measures Neves would take to cut costs.
Now, these are the same polls that had former candidate, Marina Silva, beating Neves out less than two weeks ago when this was still a three person race. Silva, as we now know, didn’t even come close to making it to the runoff.
And of course, this doesn’t mean everything is right with Brazil, no matter what the market is saying at this precise moment.
While some of Wall Street is with bullish investors — like Fortress Investments’ Mike Novogratz — in thinking regime change would make Brazil a buy, others think this entire trade is absurd, and that it will take far more than an election to fix Brazil’s problems with inflation, corruption, and low corporate margins (among other things).
Morgan Stanley sees the country’s GDP going negative in the first half of 2015, contracting -0.4%.
Cantor Fitzgerald put it even more succinctly in a recent note saying, “Our thought is that the Brazilian ‘election trade’ will eventually be sniffed out as the farce it clearly is.”
In the meantime, ride the election wave.
Just keep in mind that incumbents rarely lose in Latin America. Almost never.