Investors have welcomed the strong showing from Social Democrat candidate Aécio Neves in the first round of the Brazilian elections.
Mr Neves was widely expected to come third in the first round of the country’s elections but prominent environmentalist Marina Silva only secured 21 per cent of the vote, pushing her into third place and out of the race for the second round on October 26.
Ms Silva had seen backing for her campaign ratchet up after the death of the original Socialist Party (PSB) candidate, Eduardo Campos, in a plane crash in August.
Craig Botham, emerging markets economist at Schroders, said while it had been widely predicted incumbent Dilma Rousseff would win the largest share, it was “unexpected” that her opponent would be Mr Neves.
“This surprising result – following polls showing a strong second-place finish for Marina – is likely attributable to dismal televised debate showings by the socialist candidate,” Mr Botham said.
“The implications for the rest of the race, and the Brazilian economy, are ambiguous. While Mr Neves has stronger reform credentials than Marina, polls up to this date have consistently shown his defeat in a second-round run-off with Dilma.”
But Guy Foster, group head of research at Brewin Dolphin, said the “market is likely to see an increased chance of [Mr Neves] achieving a victory in the second round”.
“Mr Neves is the firm favourite of investors but it is difficult to forecast any outcome other than more volatility,” he added.
Anna Stupnytska, global economist at Fidelity, said markets had already rallied at the prospect of a possible victory for Mr Neves, a pro-business candidate with strong political credentials.
“For some time, Mr Neves seemed like a long shot, with the leftist president Dilma Rousseff looking hopeful of securing a second term,” she said.
“But a pre-vote poll on Friday [October 3] changed the mood, with voters for the first time indicating stronger support for Mr Neves, which may have helped him when Brazilians went to the ballot boxes on Sunday [October 5].
“Mr Neves’ strong pro-business stance would likely be welcomed by investors, giving Brazilian companies the reform and support they badly need.
“Brazil has a long way to go in terms of structural reform, but Mr Neves’ significant political footprint would likely be helpful in building a government committed to this change.”
Paul Locke, analyst at Westhouse Securities, said the coming week would likely show “intense volatility” in the opinion polls.
“With growth at best flat, inflation currently running above target levels (at 6.5 per cent) and faced with deficits at both the current account and fiscal levels, Brazil faces acute challenges whoever assumes power,” he said.
“This, of course, is not aided by a further weakening in the Chinese economy and commodity pricing to which the economy is so exposed.
“In the immediate term, much could depend on who (if anyone) Ms Silva chooses to endorse in the second round – although she did not endorse any candidate in 2010 when she also finished third.”
Irrespective of what Ms Silva decides, the commentators all said the markets would likely back Mr Neves.
Ms Stupnytska said a win for Mr Neves could put Brazil “on the path to real structural reform”.
“But whatever the outcome, the end of an election period is nearly always welcomed by markets, which prioritise certainty over all else,” she added.
Mr Locke agreed investors would prefer Mr Neves.
“For markets, the fiscal orthodoxy offered by Mr Neves would certainly provide a boost should he win, suggesting, like Narendra Modi in India, firmer prospects for strong market reform,” he said.
“However, we believe this remains unlikely at this stage, with Ms Rousseff already ramping up plans for further spending in areas such as social housing.”
Mr Botham said Mr Neves had performed strongly in the north east of Brazil – typically a stronghold of Ms Rousseff – but without the endorsement of Ms Silva’s party, he said it would be “difficult to foresee [Mr Neves’s] victory”.
“Beyond the electoral uncertainty, however, the macro outlook remains uncertain because whoever wins, there can be no immediate turnaround,” Mr Botham said.
“Brazil faces a plethora of deeply entrenched macroeconomic problems and while policy can make a difference, it will take time to reverse the damage of the past few years. Still, a negative outcome now seems more likely than before, given the incumbent’s track record on economic policy.”
Final countdown: Dilma Rousseff vs Aécio Neves
Dilma Rousseff
Ms Rousseff – the first woman to hold presidential office in the country – has struggled to secure the amount of public goodwill shown to her predecessor Luiz Inácio Lula da Silva, who won his second term in office with a 61 per cent majority. Ms Rouseff was elected in a run-off in 2010 and won with 56 per cent of the vote.
But of late she has come under considerable pressure.
Demonstrations were sparked in 2013 against moves by the government to increase bus and rail fares, with the discontent soon broadening to include other issues, such as alleged corruption within government.
The World Cup, hosted by Brazil, was also unpopular with a large segment of society deeming the expense of the event excessive.
However, upon closer inspection, she has delivered on some key economic indicators.
Data from Trading Economics shows unemployment has fallen since Ms Rousseff took office in 2010 and is now at 5 per cent. The minimum wage has also risen, the data provider said, and now rests at R$724 (£705) per month.
Undernourishment has also improved, as has healthcare, with 14,000 doctors brought in from Cuba.
Aécio Neves
The Brazilian economist, politician and former president of the Brazilian Social Democracy Party was previously the governor of Brazil’s second most populous state Minas Gerais from 2003 to 2010 and is at present a member of the Brazilian Federal Senate.
The 54-year-old has substantial links to politics. His grandfather Tancredo Neves successfully ran for the presidency in 1985 but died before taking office, according to the BBC.
Mr Neves seems to be investors’ preferred candidate – over and above incumbent Dilma Rousseff.
Mr Neves has been reported as criticising Ms Rousseff’s handling of the economy, which contracted 0.9 per cent year on year in the second quarter of 2014.
The services sector is the most important and accounts for 69 per cent of total GDP. The biggest segments within services are government, education and health.
Commentators say Marina Silva’s economic policies matched those of Mr Neves, making it more likely she will endorse him in the second round.
