The election of Jair Bolsonaro as Brazil’s president boosted the São Paulo stock market to unprecedented levels. Ibovespa, the country’s benchmark index, hit its all-time high of 89.820 points on December 3, despite a meltdown of international markets – especially in emerging economies.

Not only the São Paulo stock exchange is one of the just four in the world to end 2018 in the positive side of zero – alongside with Argentina, India and New Zealand – but it is also, by far, the best performing global index in local currency. In other words, when it is not taken into account the fact that the Brazilian Real dropped some 13 percent against the U.S. Dollar.

Elsewhere, apprehension regarding the escalating trade war between China and the United States, concerns about the slowdown of the global economy and interest rates hikes by the Federal Reserve formed a recipe for generalized losses. In Brazil, In the three-and-a-half months between the start of the presidential campaign, on August 16, and the last trading session of the year, on December 28, the Brazilian market gained 14 percent.

In the meantime, major indexes from the U.S., Europe, and Asia plunged between 8 and 13 percent.

The Bolsonaro effect

The secret behind such a strong performance? Local investors. Foreigners actually pulled nearly BRL 11 billion (USD 2.8 billion) out of Brazil stocks this year, Bloomberg reports. “The market’s optimism with the new administration led to a decoupling of Brazil from the rest of the world,” says Tiago Reis, founder of investment consultancy Suno Research.

But how much of this performance can actually be attributed to a “Bolsonaro effect”? The answer cannot be entirely quantified. However, it is possible to identify the shares or groups of stocks which benefited the most and highlight the “winners” of this rally.

For starters, Ibovespa had a weak first semester, having lost over 10 percent by mid-June. The comeback only started on September 14, when a Datafolha poll first showed the far-right politician with a comfortable lead over his rivals.

Additional surveys on the week leading to the first round and the actual results on October 7, which showed Mr. Bolsonaro with 46 percent of the valid votes among 13 candidates, set the course: Brazil’s benchmark index was up for a year of gains while most major markets would pile up loses.


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Pedro Galdi, an analyst at Mirae Asset, warns that stock markets are affected by a number of factors. It might be risky to pinpoint one specific cause for the overall performance of assets since investors are also paying attention to the companies quarter results or regulatory issues, for instance.

And that it is actually the case with Ibovespa’s top performing share since the presidential campaign started.

Gol Airlines (GOLL4), which went up 98.9 percent since August 15, might have benefited from the tailwind Mr. Bolsonaro’s election represented, but two other pieces of news were its actual windfall. On December 10, competitor Avianca Brazil filed for bankruptcy and on December 13 President Michel Temer issued a decree allowing air carriers to be entirely owned by foreign capital.


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How the election influenced the stock market

Obviously, the election of Mr. Bolsonaro is not the only reason why Brazilian stocks performed so well in 2018. However, by analyzing the performance of the 65 shares that compose the Ibovespa index, it is clear that the political scenario played a fundamental role in this year’s positive results.

Among the companies that made it to the “Top 5” best-performing stocks, some are state-run. Such is the case of energy firms Cemig, Copel, and Eletrobras – controlled by the states of Minas Gerais, Paraná, and the federal government, respectively. The right-wing tsunami in those states – and at the federal level – explain investors’ optimism.

These shares are part of a group known by traders as the “Election Kit,” companies which are most affected by the political scenario. Their stock performance is thus heavily affected by the electoral calendar. This year, the shares that make up the “Election Kit” were up more than twice as much as the benchmark index, gaining an average of 35 percent – while the Ibovespa index jumped by 14 percent since politics got on the spotlight.

Mr. Galdi explains that, on top of state-owned enterprises, private banks and the mining giant Vale, which was privatized in the 1990s but still has ties to the federal administration, are also part of this group. “They are all more exposed to the expectations of improvement of the economy and of confidence indicators,” he says, in a reference to the hopes Mr. Bolsonaro represents for the markets.

According to the analyst, this “Kit” is composed by Petrobras (PETR3, PETR4), Eletrobras (ELET3, ELET6), Banco do Brasil (BBAS3), Cemig (CMIG4), Copel (CPLE6), Bradesco (BBDC3, BBDC4), Itaú Unibanco (ITUB4), Santander (SANB11) and Vale (VALE3).

Although they total only 12 stocks, the companies’ market value and the volume of the negotiations held in the stock exchange make them account for 48.6 percent of the Ibovespa index. Hence, their performance affects Brazil’s benchmark nearly as much as that of all the other 53 stocks which are part of Ibovespa.

The virtual certainty investors have that the new Economy Minister Paulo Guedes will implement an ultraliberal privatizing agenda boosted especially shares of state-owned firms.

They outperformed the Ibovespa by larger margins than private banks, for instance. Petrobras and Vale did not do better because of the falling prices of the oil and the iron ore in the international markets. Moreover, concerns that the trade war between the U.S. and China might limit their gains also scared investors away. Nevertheless, Eletrobras rose by 59.3 percent, and Banco do Brasil, 43.9 percent in the period.


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Brazil’s stock exchange subindexes also reinforce this pattern. Public utility companies, which are all state-owned either by the federal or state governments, were the ones with the highest gains. Financial and Energy, of which Eletrobras is a large chunk, also had higher gains than the Ibovespa.

Investors remain cautious

The underperforming subindexes of consumption and industry reveal that, despite the optimism with Mr. Bolsonaro, investors are still cautious about the perspectives for the real economy. As the ongoing recovery is the slowest in Brazil’s history and unemployment is likely to remain high, there is less momentum for companies that depend on the rehabilitation of the local market. 


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Pablo Spyer, Head of Trading at Mirae Asset, says that the expectations are positive and that the structural changes Brazil need seem to be taking place. “The optimism regarding how fast the reforms will be passed comes from the credibility of the new administration and the cabinet is well regarded by the markets, above the expectations,” he says.

Due to the recent crisis that threw the country into one of its worst and longest recession in history, the Brazilian market was “lagging behind” when compared with other markets which did well in the past couple of years, Mr. Spyer explains. “Some strong profit-taking [and consequent downtrend] was already expected at those markets. Meanwhile, Brazil places itself as a destination of opportunities for the global capital,” he says, estimating “hundreds of billions of dollars” in investments in the first half of 2019.

Brazil, of course, will not be immune if a widespread crisis hit the international financial system, but the current conditions place the country in a position to be among the less harmed, according to Mr. Spyer.

The question for 2019 and is if Mr. Bolsonaro and his economic team will be able to deliver what the markets expect. That will determine if this was just the beginning of a broader trend or the whole “Bolsonaro effect” itself.

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MoneyJan 01, 2019

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BY Mario Braga

Braga is a journalist from São Paulo. He is an Erasmus Mundus Journalism scholar pursuing his Master’s degree at Aarhus University (Denmark) and at the London’s City University.