Runoff in Brazil: Bolsonaro to win, but hard job ahead

Highlights:

• Three weeks after the large victory in the first round of Brazil’s presidential election, the right-wing candidate, Jair Bolsonaro, is expected to prevail in the runoff on Sunday over Fernando Haddad, supported by the left-wing bloc.
• Brazilian assets rallied markedly in recent weeks on expectations that Bolsonaro will approve the long awaited pension reform and implement privatizations. However, Bolsonaro himself played down the possibility of selling strategic assets like energy generation, while the high fragmentation in the Congress may hinder the approval of the pension overhaul.
• After the recent rally, we see little value in Brazil’s hard currency bonds, as the spread ratio vs Emerging Markets is at the lowest level since Jan 2015. The real (BRL) is still slightly cheap, but the risk/reward profile is now less attractive.
• Despite ongoing headwinds to EM equities in general, Brazilian stocks should benefit from fewer barriers on the way to expected reforms, a recovering economy, increasing margins and payouts and thus are expected to outperform EM.

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