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Brazil Election-Day Loser Holds Key to Rally's Staying Power

Tuesday, 07 October 2014 01:16 PM

Brazilian stocks have soared 6 percent since the first round of presidential elections this weekend. Whether the rally fizzles out or gains momentum may depend most on what the third-place finisher does next.

Aecio Neves’ come-from-behind surge into second place in the Oct. 5 vote propelled him to the second round and spurred bets that a new government will take over after incumbent Dilma Rousseff oversaw the slowest expansion for any president in two decades. To overcome his eight-point deficit in the initial round of voting, he may need the endorsement of one-time rival Marina Silva and her Socialist Party. Silva has decided to support him, newspaper O Estado de Sao Paulo reported, and an announcement may come Oct. 9, Valor Economico said.

“Most investors had almost forgotten Aecio Neves was part of the race,” Eric Conrads, who helps oversee about $500 million in Latin American stocks at ING Groep NV, said by phone from New York. “Now the question mark is what percentage of Marina votes he’ll get. It’s all about that. That’s key.”

Investors who sent the Ibovespa up 4.7 percent yesterday as the country’s bonds and currencies rallied are betting on a change after Rousseff’s first term was marked by a surge in inflation and the country’s first recession in more than five years. Neves, the former governor of Minas Gerais state, has said he would name his top economic adviser, former central bank President Arminio Fraga, as his finance minister as part of efforts to regain investor confidence in Brazil.

People Vote

The Ibovespa climbed 1.3 percent to 57.828,34 at 1:02 p.m. in Sao Paulo Tuesday on reports of Silva’s support for Neves. The real also extended Monday’s gains, advancing 1.5 percent to 2.3913 per dollar. The country’s benchmark overseas bonds due 2025 rose 0.32 cent to 101.22 cents on the dollar.

To win the final round of voting on Oct. 26, Neves will need to woo voters who had cast ballots for Silva, a 56-year-old former environment minister and evangelical Christian who polls had shown was likely to place second and join Rousseff in the runoff.

Neves’ press office declined to comment on the impact his candidacy has on the markets. Silva’s campaign didn’t respond to an e-mail seeking comment.

“I don’t think investors are capable of doing everything, and they certainly don’t win elections,” Rousseff said in response to a question about the market reaction to first-round results. “It’s the Brazilian people who vote and win elections.”

Election Math

The benchmark index for Brazilian stocks posted the biggest rally since 2012 Monday, led by an 11 percent jump for state oil company Petroleo Brasileiro SA. The real climbed the most among major currencies tracked by Bloomberg.

The strong showing for Neves helped reverse September’s slump in Brazilian stocks and the currency, which had the worst month in at least two years on expectation of a Rousseff re-election. Rousseff got 42 percent of votes over the weekend, while Neves took 34 percent and Silva nabbed 21 percent.

In order to win the election, 54-year-old Neves would need to secure about two-thirds of the votes Silva got in the first round, according to Bruno Rovai, an emerging-market analyst at Barclays Plc. Should Silva decide to announce her support for Neves, that could help Brazilian markets extend Monday’s rally, he said in a telephone interview.

“There’s still room for further gains if Marina makes her support for Aecio official,” Rovai said from New York.

Political Capital

Of those who intended to vote for Silva in the first round, 59 percent would vote for Neves in a runoff between him and Rousseff, while the incumbent would draw 24 percent of Silva’s support in the second round, according to the latest Datafolha poll before the first-round vote.

Neves needs to convince voters discontented with the current government that he can govern better than Rousseff in order to gain their support, according to Rafael Cortez, a political analyst at consulting firm Tendencias.

“Dilma lost significant political capital and, as such, there’s a scenario of greater competitiveness,” Cortez said by phone from Sao Paulo. “The question becomes whether that movement will be enough for Aecio to manage a comeback.”

Neves’ Brazilian Social Democracy party has broader support than Silva’s allies and is more capable of carrying out the changes needed to strengthen the Brazilian economy, said Wagner Salaverry, a director at Quantitas Gestao de Recursos SA.

Now Neves

While Rousseff’s party will remain the largest in the lower house of Congress, it will lose 18 seats to have 70 votes, based on partial election results, the Chamber of Deputies news agency reported yesterday. Neves’ party would gain 10 seats to have 54, and Silva’s supporters would total 34 from 24 previously, the agency said.

“Markets are rallying not just because the results were less favorable for Dilma, but also because her opponent is now Aecio,” Salaverry, who helps manage about 15 billion reais ($6.33 billion) at Quantitas, said by telephone from Porto Alegre, Brazil.

The Ibovespa had fallen 12 percent from this year’s high on Sept. 2 through last week as polls showed increased support for Rousseff’s re-election bid. Since taking office in January 2011, her administration has stepped up the government’s role in companies, changing concession rules to lower electricity rates and capping gasoline prices to tame inflation.

Under Rousseff’s watch, Brazil slipped into its first recession in more than five years in the second quarter, even after she cut taxes on consumer goods and increased government spending. A weak economic outlook will probably keep weighing on the country’s markets regardless of the winner of the election, according to Michelle Gibley, director of international research at San Francisco-based Charles Schwab Corp., which has $2.38 trillion in assets.

Chasing Polls

“Investors need to be careful chasing whatever the latest polls are before making decisions,” Gibley said by phone from Denver. “If you look at a longer-term basis, it’s going to be tough to change Brazil’s course.”

Even though economic fundamentals are weak, investors may be encouraged to buy if Neves wins the presidential vote because of confidence that his team would be more successful in turning things around eventually, said Joao Medeiros, a director at Pioneer brokerage. Rousseff has yet to announce who would make up her advisers in a second term.

“Neves is positive for the market in the sense that there is clarity about his economic team,” Medeiros said by phone from Sao Paulo. “And what about Dilma? It is a huge question mark.”

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Brazilian stocks have soared 6 percent since the first round of presidential elections this weekend. Whether the rally fizzles out or gains momentum may depend most on what the third-place finisher does next. Aecio Neves' come-from-behind surge into second place in the Oct....
brazil, stock market, rally, election
Tuesday, 07 October 2014 01:16 PM
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