The outcome: The expected outcome of the presidential election occurred, with right-wing candidate Jair Bolsonaro (PSL) winning vs the leftist Fernando Haddad (PT). Post the first round, Bolsonaro appeared to be the favourite, based on discontent with established politics. However, Brazil’s political path is unlikely to be straight-forward: a solid coalition is necessary to set important reforms, but this does not appear to be on the cards.

Implications for financial markets: In our opinion, this outcome could still result in economic policy mistakes that could have a significant impact on business and consumer confidence as well as investor sentiment. At this time, considering that the stock market had already rallied and equity valuations are not cheap overall, we would maintain a neutral stance on equities. However, we would shift to a more positive stance as soon as supportive signs emerge. Regarding fixed income, we are positive on the credit market, which is expected to remain relatively stable in the upcoming months and where valuations still look reasonable. With regard to currency market, we have a positive view on Brazilian real against other EM currencies.

Impact on the macro situation: Brazil’s vulnerability is mostly related to domestic situation; so, the impact of a new administration on the macro environment mainly depends on how important reforms unfold. If the new government doesn’t offer positive signs in the short term (diluted pension reform would be a positive), the impact could come via business/consumptions confidence impacting investment decisions. In the event that fiscal reform (more needs to be done in this regard) is not implemented, we are likely to see impacts in the medium/long-term. Awaiting signs regarding what is to come from the new government, we remain cautious with respect to the consensus forecasts.