Market Overview

Election Surprise Moving Brazilian Stocks

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Positive news out of Brazil to start the week has provided the country’s stock market with a much-needed boost. The first round of voting resulted in the incumbent and favorite Dilma Rousseff getting 41.6 percent of the votes and her pro-business rival Aécio Neves acquiring a very surprising 33.6 percent. Marina Silva came in third with 21 percent.

Since any president in the country must have greater than 50 percent of the votes to be elected, Rousseff and Neves will have a "run off," and will have to fight for the 21 percent that backed Silva.

Rally

The rally in the stock market was likely caused by the surprising support for Neves, who was widely written off as a contender. Running under the Brazilian Social Democratic Party (PSDB), Neves is a business man who has pushed for increased trade and lower government spending; he's what many people believe will help bring Brazil out of its current economic downturn.

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Brazilian stocks have been up across the board this week, and some of Monday's biggest winners are below.

iShares MSCI Brazil Index Fund ETF (NYSE: EWZ) is comprised of a basket of companies based in Brazil. The top holdings include Itau Unibanco Holding SA (NYSE: ITUB) at 8.7 percent, Petroleo Brasileiro Petrobras SA (NYSE: PBR) with a 6.9 percent holding, and Ambev SA (NYSE: ABEV) at 6.7 percent. iShares MSCI Brazil is down 3 percent over the last six months. The news on Monday sent the ETF up 6 percent to a new one-week high.  

Banco Bradesco S.A. (NYSE: BBD), meanwhile, is one of the largest banks in Brazil, and has spiked on the news of the presidential run off. Banco Bradesco is up 5 percent over the last six months and was up over 10 percent on Monday. The more ground Neves gains on Rousseff, the more shares could benefit.

The largest energy company in the country, Petrobras, is a top holding in iShares MSCI Brazil, and also rallied on the election news. It is an oil and gas company that operates in Brazil as well as internationally, and it's involved in every aspect of the industry including exploration, production, development and sales.

Rousseff, the current President, has instituted price controls on what consumers pay for refined products, which cuts oil companies' revenues and profits. Neves' election would undoubtedly help the company’s bottom line, as he has a much different outlook on the economic regulatory situation. It is up 11 percent over the last six months, including 13 percent on Monday.

Ambev, through its subsidiaries, produces, distributes, and sells beer, draft beer, soft drinks, other non-alcoholic beverages, and food throughout the Americas. Ambev's revenue grew by 22.7 percent compared to the same quarter one year before, beating the industry average of 4.2 percent. Ambev is down 10 percent over the last six months, but has spiked 4 percent on the election news.

Final Thoughts

Success by Aécio Neves’ presidential campaign will likely continue to drive Brazilian securities out of their current downturn. The run-off is set for October 26, and as the polls swing back and forth, it could add to the already high volatility in the Brazilian stock market.

As of this writing, Rousseff is the favorite to remain president of the country, but as the first election displayed, anything can happen.

Disclosure: At the time of this writing, the author had no position in the equities mentioned in this report.

Posted-In: Aecio Neves Brazilian stocks Dilma RousseffEmerging Market ETFs ETFs

 

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