latamen
Brazil votes against corruption with conservative Bolsonaro win

Brazil votes against corruption with conservative Bolsonaro win

08-10-2018 | Emerging markets alert

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.

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

Speed read

  • Right-wing candidate Bolsonaro attracts strong first-round support
  • The congress elected has a conservative majority
  • Brazil poised for 28 October two-way Bolsonaro vs. Haddad runoff

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.

Stay informed on emerging markets with monthly mail updates
Stay informed on emerging markets with monthly mail updates
Subscribe

Anti-corruption stance pays off

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.

Reform potential gains traction

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.

Market-friendly, on balance

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.

Positioning

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%.

Subjects related to this article are:

Important information

The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).

This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.

This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.

I Disagree