Past presidential elections in Brazil have been marked by wild swings in asset prices. Brazilians are once again gearing up to cast their ballots. But acrimonious exchanges aside, the campaign has thus far stood out for its relative lack of market volatility.
With four weeks to go to the first-round ballot, leftist ex-president Luiz Inácio Lula da Silva remains the frontrunner. But his lead is narrowing. He is polling at 43 per cent while right-wing incumbent Jair Bolsonaro is at 35 per cent, according to a recent survey.
The one-month volatility in the real, a gauge of how much money investors are willing to pay to insure against the currency’s swings over the next 30 days, stands at 16.6. That is well below the level of almost 30 reached at the start of the pandemic in early 2020.
Past elections featured candidates with starkly different economic and fiscal agendas. There is less to differentiate Lula from Bolsonaro economically. Neither is seen as particularly committed to fiscal discipline.
Lula presided over a commodity super cycle that lifted tens of millions of people out of poverty during his two terms as president from 2002 to 2010. He has been calling for more public spending to fight hunger and inequality. Bolsonaro has already turned on the spending spigot, boosting welfare payments and fuel subsidies.
While the Brazilian real has gained 7 per cent against the dollar this year, fear over a ballooning public deficit could weigh on the currency.
Whoever wins will have to deal with a potential global recession, a stagnating economy, high inflation and rising interest rates. Brazil is set to grow between 1 and 2 per cent this year. The budget deficit is expected to widen to 7.5 per cent GDP, compared with 4.2 per cent in 2021.
The upshot is Brazil is a haven from lofty valuations. The Ibovespa stock index is trading at about seven times forward earnings, way below the 10-year average of 11 times. It reached six times earlier this month, the lowest since November 2008. This makes it a good entry point for bargain hunters.
