SAO PAULO (Reuters) - Brazilian stocks fell sharply on Monday after far-right lawmaker Jair Bolsonaro was elected president on a market-friendly agenda, as investors booked profits from a recent rally while waiting for new signs of progress on his agenda.
The benchmark Bovespa stock index .BVSP had jumped 3.1 percent in the first 10 minutes of opening trading, fueled by hopes that Bolsonaro will make good on his pledges to privatize state firms and close a budget gap. But sentiment soon turned.
The profit-taking capped weeks of market gains as investors cheered on the chances that Bolsonaro would block a return to power of the left-wing Workers Party.
In his victory speech, Bolsonaro said he would work to reduce a government deficit and implement a free-market agenda, but he provided few details or names beyond that of his orthodox adviser and future economy minister, Paulo Guedes.
“The market is waiting for clarity on who the most senior members of government will be and which will be the first measures,” said Frederico Mesnik, partner and founder at Trigono Capital.
Blue-chips and shares of state-owned companies, which had accounted for much of the market’s recent gains, were among the biggest decliners by the end of the day.
The Brazilian real BRBY weakened 1.4 percent to 3.71 per dollar after breaching the 3.6 milestone earlier in the day.
Carlos Sequeira, a strategist at Banco BTG Pactual, said stocks are likely to resume their rally, as the index is still trading at multiples below historical averages.
“That doesn’t make sense when expectations about the next government are positive,” Sequeira said. He said the Bovespa index, which closed below 84,000, could still rise above 100,000 this year “depending on the cabinet announcements and a firm discourse in support of a pension reform,” he said.
After Bolsonaro’s win in Sunday’s run-off vote against left-wing candidate Fernando Haddad, his top economic adviser Guedes said the administration will try to plug the budget deficit within a year, a goal that would be all but impossible without an overhaul of the nation’s costly pension system.
“Markets hope that a Bolsonaro win unleashes animal spirits in Brazil given the market-friendly economic team headed by Paulo Guedes,” said Yacov Arnopolin, an emerging markets portfolio manager for PIMCO.
A University of Chicago-trained economist and fund manager poised to lead Bolsonaro’s economic team, Guedes has won over Brazilian bankers, but his proposals have been dismissed by other advisers and could face hurdles in Congress.
“Going forward, investors are wondering whether the optimism proves short-lived in the face of governability challenges,” Arnopolin said. “Should we see a push for at least piecemeal pension reform before the end of 2018, we believe that would give Brazilian markets a boost.”
Bolsonaro’s fellow lawmaker and future chief of staff, Onyx Lorenzoni, reiterated on Monday that he would rather tackle pension reform next year.
Bolsonaro’s once-tiny Social Liberal Party (PSL) emerged from the elections with the second-most seats in the lower house of Congress, but that is far from enough to pass constitutional amendments needed for pension reform.
Strategists at XP Investimentos estimated that the Bovespa index could reach 100,000 by year-end as investors give Bolsonaro the benefit of the doubt, while the real would strengthen to between 3.50 and 3.70 reais to the dollar.
“In order for that movement to be sustainable, reforms are crucial. If reforms materialize in 2019, the stock index could reach 125,000 by the end of next year,” XP strategists wrote in a report.
Reporting by Paula Arend Laier in São Paulo; Additional reporting by Tommy Reggiori Wilkes and Helen Reid in London; Writing by Bruno Federowski in Brasília and Marcelo Rochabrun in Sao Paulo; Editing by Matthew Mpoke Bigg, Frances Kerry and Andrea Ricci and Dan Grebler