The upcoming Brazilian elections are causing market volatility well above what Indian markets saw earlier this year, and a light should not be expected at the end of the tunnel.
Brazilian presidential elections are scheduled for October 5 and the country’s markets have been responding drastically to poll results.
In the past three weeks, the Brazilian bovespa has declined by 15 per cent in sterling terms, as the likelihood of president Dilma Rousseff retaining her presidency has increased.
A Datafolha poll on Tuesday said Ms Rousseff would get 49 per cent of the vote in a head-to-head showdown with Socialist Party candidate Marina Silva. Ms. Silva would capture 41 per cent of the vote, according to the poll, which has a 2 percentage point margin of error.
Sophie Bosch de Hood, fund manager of the £41.6m JPMorgan Brazil fund, the only closed-ended fund with a Brazil focus, according to Oriel Securties, is anticipating volatile markets until a final decision is made.
“The markets are responding quite drastically to every poll, we have surpassed what India saw earlier this year. Fundamentals do not really seem to matter. The market is politcally charged,” she said.
However, a decision could be a few weeks away. If no candidate receives more than 50 per cent of the vote on October 5 then a second election will be held on October 26.
Ms Bosch de Hood thinks a second round is likely and will offer Marina Silva or Aécio Neves a better chance.
“Right now Dilma gets a lot more TV time. If it goes to second elections it will even out,” she said.
Daniel Isidori, emerging markets fund manager at Threadneedle Investments, said following the emergence of Ms Silva as a strong contender, the outcome of the election was now “far less certain” than a few months ago.
“But while the outcome of the election is difficult to predict, it is certain that the eventual winner will face daunting economic challenges,” Mr Isidori added.
He said investors “certainly appear to favour Silva over Rousseff”, who has been criticised for “intervening excessively in the economy”.
“We believe victory for Silva would certainly give financial markets a lift and would boost business and consumer confidence, while the return of Rousseff as president for a second term would have a negative impact,” Mr Isidori said.
“However, 2015 is likely to prove a tough year for the economy whichever way Brazilians vote. The economy fell into recession in the first half of the year and Brazil is likely to see only low growth in 2015.”
Ms Bosch de Hood agreed with this sentiment.
“Whoever wins changes will be needed,” she said.
“The government cannot go on the way its going. If, as is increasingly likely, Dilma Rousseff wins then it is likely to be reform at quite a subdued pace. It can not all be done at once.”
Craig Botham, emerging markets economist at Schroders, said when one considered Brazil’s problems, “even the cheeriest of optimists can become depressed”.
“Even if a new government comes in, a silver bullet solution seems unlikely,” he said.
Schroders expects growth for Brazil to be 1 per cent, compared to the City consensus of 1.4 per cent.
