Markets in Brazil React Favorably to Neves’ Candidacy

By Lise Alves, Senior Contributing Reporter

SÃO PAULO, BRAZIL – The surprising outcome of Sunday’s presidential elections, with Aecio Neves of the PSDB (Social Democracy Party) winning more than 33 percent of the votes and making it to the second round of elections boosted investors’ spirits in Brazil. The country’s stock market (Bovespa) registered on Monday the highest one-day hike in more than three years, closing the day up by 4.72 percent at 57,115 points.

“Aecio Neves is the candidate of the business sector,” said Carlos Caicedo, senior principal analyst for Latin America at IHS Country Risk on Bloomberg TV after Sunday’s results. “They would love Neves to win.”

The market’s upbeat reaction, say analysts, was less due to the fact that Aecio Neves made it to the second round and more due to the much smaller difference between him and incumbent president Dilma Rousseff of the PT (Workers’ Party) than predicted by polls; a little over 8 percent.

According to analysts, the financial market’s preference for Neves is due to the candidate’s promise to maintain inflation at the center of the target and meet all the commitments of the primary surplus and floating foreign exchange.

Although Neves has said repeatedly he is committed in maintaining some of the social programs implemented by the PT, such as Bolsa Familia, an PSDB administration is likely to conduct some structural reforms and promote tough fiscal adjustments, which could be interpreted as benefiting the business class. In addition, seeking to bring more ‘predictability’ to Brazil’s economy, the candidate has signaled if elected he would nominate former Central Bank president, Arminio Fraga as his Finance Minister.

In the first two days of this week, Brazil’s financial market was so optimistic that not even the IMF’s (International Monetary Fund) report on Tuesday morning, revising downwards Brazil’s economic growth, damped investors’ enthusiasm. In its report, the IMF revised Brazil’s economic growth for the sixth consecutive time, from 1.3 percent in July to 0.3 percent this year. The Bovespa Index closed Tuesday with a gain of 0.56 percent, at 57.436 points. Since Monday the Bovespa Index has gained 5.31 percent.

IHS, however, says it is still too early to call it a win for Aecio Neves. The consultancy says that although Rousseff’s advantage over Neves is smaller than previously forecast, it nonetheless ‘appears enough to secure her a second mandate’. “They will portray Neves as the candidate of the bankers, of the wealthy in Brazil and Dilma (Rousseff) will be the candidate of the poor,” says Caicedo.

Although at first investors may be encouraged with the election results of the more pro-business candidate, warns IHS, there will be a lot of volatility in the market in the days leading up to the second round. “In a few days if they see Dilma is increasing the gap again, we will see a drop again in the stock market. It will be a yo-yo until October 26th,” says Caicedo.

“Those who took to the streets in June of 2013 they are not unhappy with Dilma Rousseff, they are unhappy with the whole establishment and they see Aecio (Neves) as part of the establishment, not as an alternative to Dilma Rousseff,” adds the analyst.

Asked about the financial sector’s volatility, incumbent President Dilma Rousseff said Monday she is not concerned with the market’s strong showing after Sunday’s elections. “I believe that investors can do a lot, but they don’t win elections in Brazil,” she told reporters, adding that only the Brazilian people determine an election result.