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Investors in Brazil watch action, not words from front-runner Bolsonaro

Wed 10th October, 2018 8:41pm
By Rodrigo Campos NEW YORK, Oct 10 (Reuters) - A rally in Brazilian assets could extend if market favorite Jair Bolsonaro wins the presidential election on Oct. 28 and pushes through reforms for the pension system and privatization process, investors said. Markets seem to be shrugging off Bolsonaro’s lack of detail on policies throughout the campaign, as well as his misogynist, homophobic and racist tone. They also appear to be dismissing the concern from some Brazilians over what his discourse could trigger, in a country mired in violence and deeply polarized. "Not a single investor has told me 'I’m not getting into the Brazil story because it is too polarized," said Alberto Bernal, chief emerging market and global strategist at XP Investments in Miami. "The reality is that the polarization that exists in Brazil is not different from that in the UK, in Germany, the U.S.," he said. "The world has become much more polarized." Bolsonaro beat expectations by receiving 46 percent of the vote, almost 17 points clear from Fernando Haddad from the leftist Workers Party (PT) who came in second in the first round of the elections last Sunday. He needed over 50 percent in the first round for an outright victory. Investors still fear a PT victory would mean a return to a state-led economy that would derail the reforms that current and widely unpopular President Michel Temer of the Brazilian Democratic Movement Party (PMDB) has partially pushed through Congress. Gains by Bolsonaro's party over the PT in last weekends election helped lift Brazilian assets. "At stake was a return to the interventionist policies of the PT. That is now less likely, though not impossible," said Alberto Ramos, Goldman Sachs' head of Latin America economic research. "If the (stock) market gets more comfortable with implementation, there is a lot more upside possible," he said. Pension reform is the most important item on investors' minds, said Jim Craige, head of emerging markets at Stone Harbor Investment Partners. "It will require political deftness on his part and we don't know enough about him yet to say with a high degree of conviction that this will get done," said Craige. "This will play out as he assembles his team." ORTHODOX PACIFIER Bolsonaro has deferred on economic policy to his likely finance minister, a University of Chicago-trained economist Paulo Guedes. The institution is known for its conservative or orthodox views on economic policies. He has approached a number of other business people, mostly bankers, to take positions in his cabinet.*:nL2N1WP0HO "The market is giving the benefit of the doubt that Bolsonaro will be able to deliver on some of the things that Guedes has been talking about and is much more realistic about what is happening. Privatizing everything is not going to happen," Bernal said. On Wednesday, Brazilian asset prices fell in part after reports that prosecutors are targeting Guedes for allegedly taking part in a fraud linked to the pension funds of major state-run companies.*:nL2N1WQ0AX Still, the general consensus among financial market analysts is Brazil's assets have more room to rise. Following a sharp rally in stocks, debt and currency as Bolsonaro took a solid lead in opinion polls in mid September, Brazil's stock market .BVSP rallied to near all time highs, while its currency, the real, appreciated over 10 percent to the U.S. dollar in the past three weeks. However, at around 3.75 per dollar, the real BRL= BRLUSD=R is far from the 3.52 average over the past year or the 3.19 it averaged during 2017. The iShares Brazil exchange traded fund EWZ.P , which tracks Brazilian companies via U.S. markets, is down some 15 percent from its 2018 high and 60 percent from its life high. External factors are containing the rally, said Kathryn Rooney Vera, head of research and emerging market strategy at Bulltick LLC in Miami. If the current trade war between the United States and China were to escalate Brazil would become a 'sell,' though that is not Rooney Vera's base case. The trade spat between the two largest economies in the world has weighed on emerging markets assets globally. "Valuations finally got cheap enough," she said, noting that she went long Brazil in mid September. "Imagine what it would be up today if sentiment for emerging markets was higher." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Brazilian asset performance, 2-yr period Brazilian asset performance, 2-yr period ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Rodrigo Campos; Editing by Daniel Bases) ((; @rodrigocampos; +1.646.223.6344; Reuters Messaging:
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