Relaxed Financial Markets Look at Lula’s Comeback (Amundi)

• On equities, we expect the Brazilian equity market to rise under any final election outcome, due to various factors. Firstly, we believe the fiscal situation – a key element of Brazil’s financial stability – to be neither good nor catastrophic under either outcome. If Lula wins, he will probably not get enough support in Congress to pass all the social spending he wants to. Secondly, Brazil’s CB began its tightening cycle one year before the Fed’s 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 will probably rise more if Bolsonaro wins, as state-owned enterprises and banks would fare better. This is testified by Lula’s statements. For instance, Lula’s announced that he wants fuels produced by Petrobras to be sold at ‘cost plus’, instead of at international prices. At the sector level, we favour consumer discretionaries and corporates levered to declining long-term interest rates, such as infrastructure and real estate. READ MORE

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