October 10, 2018 / 7:44 PM / 7 months ago

Investors in Brazil watch action, not words from front-runner Bolsonaro

    By Rodrigo Campos
    NEW YORK, Oct 10 (Reuters) - A rally in Brazilian assets
could extend if market favorite Jair Bolsonaro wins the
presidential election on Oct. 28 and pushes through reforms for
the pension system and privatization process, investors said.
    Markets seem to be shrugging off Bolsonaro’s lack of detail
on policies throughout the campaign, as well as his misogynist,
homophobic and racist tone. They also appear to be dismissing
the concern from some Brazilians over what his discourse could
trigger, in a country mired in violence and deeply polarized.
    "Not a single investor has told me 'I’m not getting into the
Brazil story because it is too polarized," said Alberto Bernal,
chief emerging market and global strategist at XP Investments in
    "The reality is that the polarization that exists in Brazil
is not different from that in the UK, in Germany, the U.S.," he
said. "The world has become much more polarized."
    Bolsonaro beat expectations by receiving 46 percent of the
vote, almost 17 points clear from Fernando Haddad from the
leftist Workers Party (PT) who came in second in the first round
of the elections last Sunday. He needed over 50 percent in the
first round for an outright victory.
    Investors still fear a PT victory would mean a return to a
state-led economy that would derail the reforms that current and
widely unpopular President Michel Temer of the Brazilian
Democratic Movement Party (PMDB) has partially pushed through
Congress. Gains by Bolsonaro's party over the PT in last
weekends election helped lift Brazilian assets.
    "At stake was a return to the interventionist policies of
the PT. That is now less likely, though not impossible," said
Alberto Ramos, Goldman Sachs' head of Latin America economic
    "If the (stock) market gets more comfortable with
implementation, there is a lot more upside possible," he said.
    Pension reform is the most important item on investors'
minds, said Jim Craige, head of emerging markets at Stone Harbor
Investment Partners.
    "It will require political deftness on his part and we don't
know enough about him yet to say with a high degree of
conviction that this will get done," said Craige.
    "This will play out as he assembles his team." 
    Bolsonaro has deferred on economic policy to his likely
finance minister, a University of Chicago-trained economist
Paulo Guedes. The institution is known for its conservative or
orthodox views on economic policies. He has approached a number
of other business people, mostly bankers, to take positions in
his cabinet.
    "The market is giving the benefit of the doubt that
Bolsonaro will be able to deliver on some of the things that 
Guedes has been talking about and is much more realistic about
what is happening. Privatizing everything is not going to
happen," Bernal said.
    On Wednesday, Brazilian asset prices fell in part after
reports that prosecutors are targeting Guedes for allegedly
taking part in a fraud linked to the pension funds of major
state-run companies.
    Still, the general consensus among financial market analysts
is Brazil's assets have more room to rise.
    Following a sharp rally in stocks, debt and currency as
Bolsonaro took a solid lead in opinion polls in mid September,
Brazil's stock market rallied to near all time highs,
while its currency, the real, appreciated over 10 percent to the
U.S. dollar in the past three weeks.
    However, at around 3.75 per dollar, the real
 is far from the 3.52 average over the past year
or the 3.19 it averaged during 2017. The iShares Brazil exchange
traded fund, which tracks Brazilian companies via U.S.
markets, is down some 15 percent from its 2018 high and 60
percent from its life high.
    External factors are containing the rally, said Kathryn
Rooney Vera, head of research and emerging market strategy at
Bulltick LLC in Miami.
    If the current trade war between the United States and China
were to escalate Brazil would become a 'sell,' though that is
not Rooney Vera's base case. The trade spat between the two
largest economies in the world has weighed on emerging markets
assets globally.
    "Valuations finally got cheap enough," she said, noting that
she went long Brazil in mid September.
    "Imagine what it would be up today if sentiment for emerging
markets was higher."

 (Reporting by Rodrigo Campos; Editing by Daniel Bases)
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