The Brazilian Election Results and the Future for the Leading South American Economy

The Brazilian election offered a choice of the current right-wing business-friendly incumbent President versus the former President, a left-wing, socialist candidate. The gulf between the candidate’s platforms and pledged direction for Brazil could not be wider, and the contest was close. As of the end of last week, former President Lula da Silva won the election with 50.9%, with President Bolsonaro receiving 49.1% of the vote. While President Lula won, he did not receive a mandate.

Political ideologies divide Brazil, much like the US, which goes to the polls in the mid-term elections that will determine legislative majorities this week. Brazil’s political and economic direction is a critical concern for the world, as the country is the leading producer and exporter of soybeans, free market sugarcane, Arabica coffee beans, and oranges. Brazil also supplies the world with iron ore, crude oil, animal proteins, and a host of other raw materials. 

The Brazilian currency and stock market have been steady in the wake of the election.

Brazil narrowly chooses socialism

Incoming President Luiz Inacio Lula da Silva is a Brazilian politician, trade unionist, and former metalworker who was a former President before he was convicted and imprisoned on corruption charges. President Lula led the country from 2003 through 2010 and spent 580 days in prison. On January 1, 2023, he will return as the leader of South America’s leading economy. 

In many ways, the October 30 election was a choice between capitalism and socialism. While the more socialist candidate eked out a victory, outgoing President Bolsonaro will remain a high-profile opponent of the coming administration. Brazil is essentially a capitalist country with a “mixed economy,” blending a free market economy with state intervention, regulation, and elements of a planned economy. The Lula victory will push Brazil towards a liberal-socialist orientation, given his social platform, past leadership, and support for environmental causes. 

Brazilian markets have been stable following Lula’s victory over the current far right-wing and business-friendly President Bolsonaro. 

The Brazilian real has been trending slightly higher

Since Brazil is a leading commodity-producing country, worldwide inflation pushing raw material prices higher has supported the Brazilian real. 

While the US dollar rose to the highest level since 2002 over the past months, the real has not depreciated against the US currency since the 2020 low. 

The chart highlights that the Brazilian real versus the US dollar currency relationship reached a low of $0.16756 in May 2020. The global pandemic hit Brazil hard, with the second-leading number of fatalities and third-leading number of infections. Meanwhile, the real has made higher lows and higher highs against the US dollar over the past two years and was trading at over the $0.1950 level on November 7. 

The short-term chart illustrates the real was below the $0.19 level on October 28 going into the October 30 election and moved higher in its aftermath, a vote of confidence for the incoming President.  

Brazilian stocks are steady 

Brazil is home to some of the world’s leading commodity-producing multinational companies. The iShares MSCI Brazil ETF product (EWZ) holds significant exposure to Vale SA (VALE), the international mining giant, and Petrobras (PBR), the Brazilian energy company. Brazilian stocks have outperformed the US equity market in a year when the leading US stock market indices have suffered substantial declines. 

The EWZ chart shows the move from $28.07 on December 31, 2021, to the $32.73 per share level on November 7, a 16.6% rise in 2022. EWZ has been an oasis of safety for equity investors during a highly volatile and bearish 2022.  

The short-term chart shows EWZ closed at $31.45 on October 28 and was higher at $32.82 on November 7, another sign that investors are not overly concerned about the shift to liberal socialism in Brazil. 

The impact of a socialist government on commodity production

The Brazilian political polls pointed to a Lula victory in early October, but President Bolsonaro outperformed the pollsters, forcing an October 30 runoff election. However, the polls before the runoff indicated that former President Lula would win the contest. The paths of least resistance of the real and Brazilian stock market remained higher, as there were no surprises other than the close result. 

President Lula will likely increase the union’s influence in addressing worker concerns over the coming months and years. With commodities in a bull market, the leading Brazilian producers are making significant profits, and the government will likely support higher wages and more worker benefits. However, the nationalization of companies like VALE, PBR, and others is unlikely, given Lula’s “mixed economy” ideology. Meanwhile, global inflation, supply chain bottlenecks, and geopolitical turmoil increase Brazil’s earning potential as it remains a commodity supermarket to the world.

Three reasons Brazilian raw material production is more important than ever

Three factors will support Brazil’s economy over the coming months and years, making incoming President Lula’s job easier:

• Trade frictions because of the geopolitical bifurcation between nuclear powers increase the opportunities for Brazilian commodity production. Russia and China are significant producers, with China being the leading worldwide raw material consumer. Brazil can fill some of the void created by Russia’s retaliation to sanctions imposed by the US, Europe, and their allies. 
• Worldwide inflation remains bullish for commodity prices. With food and energy at the highest level in years, Brazil stands to benefit from increased earnings and tax revenues from the country’s production capabilities. 
• Brazil retains a close relationship with the US, which will likely improve given the similar goals of the Biden and Lula administrations. Moreover, increased Chinese investment in Brazil over the past years places Brazil in a unique position as a negotiator and moderator as US-Chinese relations have deteriorated.

The bottom line is that Brazilian markets have reacted positively to the election. However, the country has a long record of corruption and scandals that have rocked the economy and chased away investment capital. President Lula’s challenge will be to avoid scandal and unify the divided country after the election. While it is a tall order, the real and Brazilian stock market seem to be giving optimistic signals. 

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