Conservative candidate Jair Bolsonaro (PSL) received 46% of the valid votes, while Workers’ Party contender Fernando Haddad (PT) won 29% of valid votes. Bolsonaro led in 17 states against nine for Haddad. The candidates will participate in the runoff, scheduled for 28 October.
Bolsonaro’s party became the second biggest in the Congress with 51 seats out of 512. The Conservative, Agribusiness and Christian benches advanced the most in the lower house elections, now accounting for more than 2/3 of the Chamber of Deputies and resulting in one of the most conservative congresses Brazil has ever had. The senate maintained its current balanced profile with more center seats but a pro-reform composition.
The biggest losers were the establishment parties, the MDB of President Michel Temer, the Social Democrats of former president Fernando Henrique Cardoso (PSDB) and the Workers’ Party (PT), all losing ground in both the lower and upper houses. Many congressmen who were subject to investigation by the corruption-fighting Car Wash task force (Lava Jato) were not re-elected and lost special forum protection.
Bolsonaro has been a constant target of media criticism, given his positions in favor of gun possession liberalization, hard line statements regarding criminality, corruption and conservative social views. However, the result of the general elections show that Brazilians voted first and foremost against corruption and political privileges. In that sense, Bolsonaro’s campaign has personified the fight against crime and corruption, gaining better odds to win.
The PT candidate, on the other hand, suffered voter rejection given the past corruption scandals involving the Workers’ Party that culminated in the impeachment of former president Dilma Rousseff and the imprisonment of former president Lula. In addition, the other center-right candidates who were running had an economic agenda more aligned with Bolsonaro. They attracted more than 10% of the valid votes and we do not envisage their electorate migrating to the Workers’ Party.
Despite doubts raised by the domestic and international media over Bolsonaro’s ability to pass reforms, we think that he will push for tax and pension reforms. Generally described as a populist leader, Bolsonaro has (as congressman) recently voted in favor of the spending cap and labor reform both implemented during the current Temer administration. Reforms have core importance in his economic program. Among Bolsonaro’s proposals are lower corporate taxes in exchange for a dividend tax, government spending cuts, and tax, administrative and pension reforms.
In the event of his election, Bolsonaro should have support in both houses and therefore reasonable ability to govern. The parties in the center-right would support his government while the social democrats (MDB and PSDB) should remain neutral. Left wing parties would form the opposition. Nevertheless, in a reform scenario, the democrats will vote in favor. In addition, we have seen 2/3 of the Congress already migrating support to his candidacy.
The market should react positively since Bolsonaro won more votes than the polls initially estimated and the Congress as elected is more likely to favour reforms. In addition, even in the event of a runoff win for the Workers’ Party, the elected congress wouldn’t pass measures such as abolishing the spending cap or reviewing the labor reform.
However, given the highly polarized views expressed in the second round, we do see some risk of social unrest until the elections are concluded.
Within our fundamental Emerging Markets Equities core strategy, we hold a similar weight to the benchmark in Brazil, while the unconstrained Emerging Stars strategy has a weight of approximately 8%.