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Brazil Update

The purpose of my trip to Brazil was to evaluate the potential momentum of its economic recovery, the risk of an adverse outcome to the upcoming presidential elections, and companies’ outlooks and investment plans.

Concluding thoughts:

Lula will not be able to run as the appeals process for his criminal conviction will get stalled in the courts beyond the elections. His party, the PT, has until mid-April to submit a candidate and most other candidates are compromised in one way or another. Regardless, this party is rudderless and has no natural alternative leader to capitalise on Lula’s popularity. The risk of Bolsonaro, the extreme right candidate, is also remote given his lack of a national political machine and his low allocated TV advertisement. It is also likely that he
is his own worst enemy; he is known to make vulgar and demeaning comments.

The candidates from the centrist parties have the best chance of winning, and I would currently estimate this to be an 80% probability. Companies unanimously agreed that Brazil is changing, applaud the reforms and are investing for the future. Interest rates are significantly lower, inflation is under control and they believe the reform agenda will move forwards after elections. The equity and currency market recovered from their crisis lows, but in our opinion, the medium-term earnings potential for Brazilian companies continues to be underestimated.