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Lula’s conviction good news for Brazilian stock market

Lula’s conviction good news for Brazilian stock market

25-01-2018 | Emerging markets alert

Lula’s conviction significantly changes the dynamics for Brazil’s presidential elections this year.

  • Daniela da Costa - Bulthuis
    Daniela
    da Costa - Bulthuis
    Portfolio Manager & Country Specialist

Speedread

  • Lula being sentenced to jail makes comeback as president unlikely
  • New president more likely to be a central-right candidate
  • We are slightly underweight Brazil but like companies that will benefit from market-friendly policies

On 24 January, in an historical event, former Brazilian president Luiz Inácio Lula da Silva lost his appeal against a corruption and money laundering conviction. The regional court of judges that revises all appeals related to the Lava Jato - or Car Wash - criminal investigation sentenced Lula to 12 years in prison.

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Leading the polls

Lula has been leading all presidential polls, since he announced his intention to run for office again. Having headed a moderate central-left government coalition in his past two presidential terms from 2003 to 2010, the tone of Lula’s speeches has recently moved back to the radical left stance he had in his early days, when he was an union leader. In his recent rallies, he claimed accusations against him were forged and that former president Dilma’s impeachment was a coup. He has also been vocal in the local media against the Lava Jato probe, which he and his supporters have been calling a witch hunt against his government allies. In addition, he has been criticizing the current government’s privatization program and reforms agenda, taking a more populist attitude.

Comeback unlikely

After the unanimous court decision, his chances of making a comeback are severely reduced. Although he can still try to appeal to the Supreme Court, he will have very limited time to have the verdict overturned before the announcement of the official election candidates in August. Until then, he falls under the ‘clean record’ law, which forbids election candidates that have been convicted for crimes to run for office.

Two other candidates with good readings in the polls are conservative congressman Jair Bolsonaro and social democrat Geraldo Alckmin, Governor of the province of São Paulo. Both have a more constructive view on privatization, liberal economic policies and reforms. Even though Bolsonaro and Alckmin may receive just part of Lula’s votes, there is no strong name in the left wing to fill Lula’s shoes. All polls without Lula point to a victory of a central-right candidate.

The question remains who Lula and his party will support. They may decide to come up with a new name, like former mayor of São Paulo Fernando Haddad, but he has not performed well in the polls. Other left-wing candidates, such as Ciro Gomes, who was a minister in Lula’s cabinet and comes from the democratic labor party, still score low in the polls.

Good for stock markets

After this event, we see a more favorable outlook for the Brazilian elections and stock markets. In addition, the weakness of Lula and the left wing may encourage the government to push again for the pension reform discussion in Congress next month. Fears of Lula’s comeback had discouraged politicians to vote in favor of the pension reform, obliging the government to postpone the vote on a social security bill.

Although Lula’s conviction is a positive development, the road to the elections is still long and significant risks remain. Besides that, the new government will need to continue the difficult reform process, which will not be an easy task.

From a portfolio perspective, our core emerging markets equities portfolios have a small underweight in Brazil, but in our stock selection we have a preference for companies that will benefit from reforms and the implementation of market-friendly policies.

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