Brazil’s president, Dilma Rousseff, was narrowly re-elected last week, prompting a 5% drop in the benchmark Ibovespa stockmarket index and a renewed slump in the currency, the real – now at a nine-year low against the US dollar.
Her opponent, Aécio Neves, had been the markets’ favourite, as he had appeared more likely to speed up economic reforms to promote investment, tackle red tape and temper rising public spending.
However, as Lewis Braham notes in Barron’s, Neves always said he wouldn’t scale back Rousseff’s popular anti-poverty programmes, which included higher health and education spending. So how far he would have got in restoring fiscal discipline is an open question.
Conversely, Rousseff shows signs of limiting her interventionist tendencies: while she has forced oil giant Petrobras to keep heating prices low, she has “already backed off on some price constraints”, says Marc Tommasi of the Manning & Napier Emerging Markets fund.
More generally, she has struck a conciliatory tone and promised to improve the public finances, fuelling speculation that she will appoint a more pro-business replacement when the incumbent finance minister steps down in December.
She must now attempt tax changes and try harder to attract private investment into infrastructure, says The Economist.
Even if Brazil makes scant progress on reforms in the next few years, this scenario appears to be priced in: the market is on a cyclically adjusted price/earnings ratio of just ten. Throw in the country’s impressive long-term potential, young population and wide array of soft commodities, and this means it remains a buy.