Brazil Shares Jump, Real Surges After First Round of Presidential Vote

Carlos Melo
Insper Instituto de Ensino e Pesquisa

Brazilian shares jumped and the real surged against the dollar after pro-business candidate Aécio Neves performed better than expected and placed second in Sunday’s presidential election. 

Mr. Neves will face President Dilma Rousseff, who finished with the most votes Sunday, about 42%, in a runoff on Oct. 26. Mr. Neves received about 34%. 

The benchmark Ibovespa stocks index closed 4.7% higher at 57,115 after jumping more than 7% shortly after the session opened. The real exited active trading at 2.4298 to the dollar, according to Tullett Prebon via FactSet, after closing at 2.4724 to the dollar on Friday. 

Investors have complained about Ms. Rousseff’s economic policies, which they say have hurt growth. For weeks Brazilian shares have risen and the real strengthened on any bad news for the president, and vice versa. 

“The market sees her as interventionist and she has lost credibility in many sectors,” said Carlos Melo, political scientist and professor at Insper, a business school and research center in São Paulo. “Once you lose credibility, it’s harder to gain it back than it is to gain it for the first time.” 

The benchmark Ibovespa stock index rose 7.5% shortly after trading started, and was trading up 4.8% early afternoon. The dollar fell to 2.4194 reais early afternoon in New York, from 2.4578 reais late Friday in New York. 

Mr. Neves, of the Brazilian Social Democracy Party, came from behind to take second place, after all but the most recent polls had him third behind Ms. Rousseff and Brazilian Socialist Party candidate Marina Silva. 

Brazilian law requires a runoff election between the top two vote-getters if no candidate gets more than half the valid votes in the first round. 

“This first round result was surprising, and now Aecio is stronger than expected going in to the second round,” said Paulo Petrassi, a partner and a portfolio manager at Leme Investimentos, based in Florianopolis, who helps oversee 600 million reais ($244 million) in assets. 

Shares of the three state-controlled companies that have fallen and risen along with Ms. Rousseff’s chances of re-election led the Ibovespa index higher on Monday. Banco do Brasil, which has suffered from the government’s use of state-run banks to try spur economic growth by lending more freely than commercial banks, rose 11.9% to 29.09 reais. 

Oil company Petrobras, which the government has forced to sell imported gasoline below cost to try to contain inflation, had the second-biggest gain in the index, advancing 11.2% to 20.40 reais. Electric utility Eletrobras has been hurt by the government’s decision to freeze power prices and to unilaterally change some terms of generation concession contracts. Its shares rose 9.8% to 6.97 reais. 

Even with his momentum, the question now is if Mr. Neves can overtake Ms. Rousseff in the three weeks before the second round. The challenger has never led the incumbent in polls and, even though he got more votes than expected, he still trailed Ms. Rousseff by eight percentage points. 

Sidnei Nehme, director of the NGO currency brokerage in São Paulo, said investors should acknowledge the reality facing whoever wins the election. The economy entered a recession earlier this year and is expected to grow less than half a percentage point in 2014, inflation is above the central bank’s target range, and the commodities boom that spurred economic growth in the past is weakening. 

These factors favor Mr. Neves, but Ms. Rousseff still has a strong base of support. Millions of poor Brazilians have been lifted out of poverty by the programs implemented by Ms. Rousseff and her predecessor and mentor, Luiz Inácio Lula da Silva. 

Mr. Neves, though, has enjoyed a steady rise in the polls in recent weeks, while Ms. Rousseff’s support has been constant at around 40%. The challenger had trailed the president and Ms. Silva in opinion polls since the Aug. 13 death of Brazilian Socialist Party candidate Eduardo Campos in a plane crash. 

Ms. Silva had been Mr. Campos’s running mate, and she moved to the top of the party’s ticket after the crash. She immediately moved ahead of Mr. Neves in first-round voting intentions and ahead of Ms. Rousseff in surveys on the second round. 

Ms. Silva slowly lost ground in polls to both Ms. Rousseff and Mr. Neves, and the last surveys before the election showed Mr. Neves with a small lead over Ms. Silva in the first round. Ms. Rousseff got the most support in Sunday’s election, as expected, with 41.6% of the vote, but less than the 44% indicated by the exit poll. Mr. Neves got 33.6% of the vote, compared with 30% indicated by the exit poll. 

“Given the strong momentum of Aécio at the end of the first round, the next polls on the runoff will likely show him on the rise, possibly technically tied with Dilma,” said Luciano Rostagno, chief strategist at the Banco Mizuho do Brasil.

 

Fonte: Wall Street Journal – 06/10/2014

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