A Stock Investor’s Guide to Brazil’s Presidential Runoff Vote

(Bloomberg) — Brazilian stocks have outperformed global peers this year, and investors say more gains are likely as neither candidate vying for the presidency in Sunday’s decisive runoff vote is expected to jeopardize the country’s fiscal outlook in the short term.

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However, that’s where the consensus on the outlook for Latin America’s largest equity market tends to end. That’s because the two candidates — former President Luiz Inacio Lula da Silva and incumbent President Jair Bolsonaro — disagree on key issues, from the privatization of government-controlled companies to the focus on a transition to more sustainable energy sources.

While Lula, from the Workers’ Party, has been more vocal about using state-run firms to help boost the economy, Bolsonaro intends to keep pushing ahead with a privatization program he started during his first term, a plan that might include Petroleo Brasileiro SA, Latin America’s largest oil producer.

Lula took a narrower-than-expected lead in the first round of voting early this month, and since then has seen Bolsonaro close the gap in opinion polls. But in the lead-up to the final vote, the momentum for Bolsonaro, a former army captain, appears to be stalling. A PoderData survey released Wednesday showed the leftist front-runner with 53% of valid votes, up from 52% a week ago, while Bolsonaro saw his support drop to 47% from 48%.

A representative for Lula’s campaign declined to comment. A representative for the Bolsonaro campaign didn’t respond to a written request seeking comment.

What the Bolsonaro-Lula Runoff Will Mean for Brazil: QuickTake

Brazil’s Ibovespa Index is up about 15% in dollar terms this year, compared with a 19% drop in the US S&P 500 Index. Valuations still look historically attractive, and some money managers are touting the South American nation’s stocks as a top investment choice at a time when many of its developing-nation peers are struggling.

“Brazil looks better than the rest of the world on a relative basis,” says Daniela Da Costa-Bulthuis, a portfolio manager at Dutch asset manager Robeco, which oversees 200 billion euros ($200 billion) and is overweight Brazil’s stocks.

Here’s what to watch for ahead of the vote:

Homebuilders

Efforts to bolster Brazil’s low-income housing industry “should continue regardless of political outcomes,” Citigroup Inc. analysts including Andre Mazini wrote in a note last month. That means builders active in that segment, such as MRV Engenharia e Participacoes SA and Direcional Engenharia SA, could see renewed investor interest. The expected end to Brazil’s monetary-policy tightening cycle could offer another boost. Brazil’s central bank left its benchmark Selic rate unchanged at its September meeting after a series of hikes totaling 1,175 basis points. Its next decision comes later Wednesday.

State-Run Companies

Lula has signaled that Petrobras could embark on a fresh cycle of investment in lower-return assets such as refineries. Meanwhile, Bolsonaro said in August that his economic team had the green light to propose and plan a potential sale. The government controls Petrobras, with a 50% stake in the common shares of the $87 billion company. For investors, the fear is a return to policies under Dilma Rousseff, who succeeded Lula as president in 2011. Her government forced Petrobras to sell fuel at a loss, triggering a rout in the shares.

“I don’t think Petrobras is worth zero under a Lula government, and investors are aware his comeback is unlikely to represent a return for those Dilma years,” said Leonardo Rufino, a portfolio manager at Mantaro Capital in Rio de Janeiro. “But a higher level of political interference is expected.”

Consumer Discretionary

Veteran emerging-market investor Mark Mobius said last month that consumer spending would probably increase under Lula. The former president signaled that in addition to maintaining a program paying 600 reais ($113) in cash handouts to low-income families, he would boost the amount by 150 reais per child under age six. Bolsonaro indicated he intended to increase outlays made through his flagship Auxilio Brasil program by 200 reais to 800 reais a month to those who get a job while receiving the handouts.

Mall operators such as BR Malls Participacoes SA are worth watching. Discount retailers and some companies that cater to low-income consumers, including Magazine Luiza SA, MercadoLibre Inc. and Lojas Renner SA, could benefit from higher demand resulting from the stimulus programs, according to JPMorgan Chase & Co. equity strategist Emy Shayo.

Education

Shares of for-profit education companies such as Anima Holding SA and Cogna Educacao have been in the spotlight as well, as Lula said he’ll boost the government’s education program, known as Fies, by granting fresh loans to students.

Commodity exporters

If traders sense a more interventionist macro policy under Lula that pressures the Brazilian real, they might pile into the world’s second-largest iron-ore producer, Vale SA, and pulp maker Suzano SA, which get over 80% of their revenue from offshore markets.

ESG

Lula has signaled the transition to green energy would be a pillar of his economic program, an approach that might lure investors spooked by Bolsonaro’s fiery rhetoric on topics ranging from the Amazon rain forest to the pandemic. So in a Lula victory, companies working in areas such as the recovery of industrial waste, like waste-management firm Ambipar Participacoes e Empreendimentos SA, could benefit, and more broadly, large-cap stocks might see increased inflows.

“A Lula administration is perceived to be comparatively more committed to an ESG agenda, which could eventually pay foreign policy dividends,” Goldman Sachs Group Inc. economist Alberto Ramos wrote in a note.

–With assistance from Felipe Marques, Barbara Nascimento, Simone Iglesias, Mariana Durao and Ricardo Strulovici Wolfrid.