InvestmentsOct 27 2014

Schroders: Dilma’s Brazil victory bad news for markets

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The re-election of encumbent Dilma Rousseff in yesterday’s Brazilan presidential election is likely to prove a disappointment for the markets, according to Schroders.

Ms Rousseff triumphed in the second round of voting, defeating business-friendly opposition candidate Aecio Neves by a narrow margin with 51.6 per cent of the vote.

The result is unlikely to be a surprise for markets as Ms Rousseff had edged in front in most polls in the weeks leading up to the election, having secured 41.4 per cent of the vote, compared to the 33.5 per cent for Mr Neves in the first round of voting.

But Schroders chief economist Craig Botham said the result means that “hopes for reform to address Brazil’s structural economic problems have been dimmed, if not dashed”.

The Brazilian Bovespa index has fallen by 10 per cent in the past two weeks as Ms Rousseff moved into the ascendancy in the polls and it is expected to plunge lower when the market opens at midday UK time.

Exchange-traded funds listed in Europe but designed to track the Brazilian index have already plummeted this morning; the Paris-listed Lyxor ETF Brazil Ibovespa is currently down by 11.4 per cent.

Commenting on the election result, Mr Botham said: “A marked change of course in policy seems unlikely under Dilma.

“Though the president has claimed she will address macroeconomic concerns, we have heard these promises before without seeing matching policy action.

“Policy may improve slightly at the margin, but by less than is needed, or would have been delivered by opposition candidate Aecio Neves.”

Mr Botham said the result would not change his forecast for “weak” growth in Brazil next year but it has made the long-term forecast “gloomier”.

He said: “The only immediate positive from Sunday is an end to uncertainty and volatility; the market knows now to expect more of the same, however bad it may be.”