Investors are betting Brazil’s election-fueled rally has just begun — a wager that ultimately hinges on a fiscal overhaul markets have long demanded, but still know little about. Brazilian markets had one of their best days in years Monday after challenger Flávio Bolsonaro turned in a surprisingly strong showing against President Luiz Inácio Lula da Silva, fueling bets that the right-wing candidate will unseat the incumbent in a runoff later this month.
Brazil watchers expect the nation will have a better chance of tackling its ballooning deficit under the eldest son of former President Jair Bolsonaro, even though he has yet to put forth a detailed plan on how to do so. Still, that hope, combined with voters’ disenchantment with Lula that also fueled a right-wing sweep in congressional elections, is enough for firms from Pacific Investment Management Co. and UBS Group AG’s asset-management unit to Citigroup Inc. and Morgan Stanley to say Brazilian assets should continue to rally.
“Markets will probably give him the benefit of the doubt for now, but ultimately he will have to deliver on the fiscal front for the rally to be sustained,” said Anthony Kettle, a senior emerging-markets portfolio manager at RBC Blue Bay. Gains extended on Tuesday, with the currency climbing alongside emerging-market peers and swap rates falling further as markets adjusted to the expectation of lower interest rates ahead.
The country remains mired in fiscal problems. The budget deficit has swelled to nearly 10% of gross domestic product, while public debt has climbed above 80% of GDP. Bolsonaro has pledged to rein in spending, reduce bureaucracy and cut taxes, with top economic adviser Daniella Marques drawing inspiration from Javier Milei’s “chainsaw” agenda in Argentina, but offered few specifics. Still, investors see him as a step up from the status quo, and more likely to enact meaningful changes.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing