What Brazil’s general election means for markets
Comments from Cathy Hepworth, Managing Director of PGIM Fixed Income’s Emerging Market Debt Team and Portfolio Manager of Nordea’s Emerging Market Bond strategy
Brazil’s general election resulted in the victory of Jair Bolsonaro and a reshuffle of congress reflective of the underlying anti-establishment sentiment that characterized this election. The Bolsonaro administration will likely push for an overall market-friendly policy agenda that includes addressing Brazil’s pressing fiscal shortcomings. However, questions about Bolsonaro’s true commitment to orthodox policy prescriptions and governability conditions pose potential downside risks to the continued improvement of Brazil’s macroeconomic fundamentals. Various metrics, particularly those capturing the economy’s external stance, will likely keep anchoring Brazil’s creditworthiness in the short term, thereby mitigating concerns over its fundamental outlook. In a longer-term horizon, Brazilian financial assets could become reliable alpha-generating alternatives insofar as the incoming administration succeeds at alleviating supply-side constraints hindering Brazil’s growth potential and at further correcting macroeconomic imbalances, ideally shoring up those achievements via institutional arrangements.