Days after Luiz Inacio Lula da Silva exited the presidential palace in Brasilia, Mohamed El-Erian, then CEO of the powerhouse bond shop Pimco, published what was in essence a love letter to him. This was January 2011, the world was in the midst of a torrid commodities boom, Brazil’s economy was soaring, and Pimco, along with scores of other investors, had just made a fortune investing in the country’s bonds.
Lula’s management style had proved so successful, El-Erian gushed in a column for Bloomberg Opinion, that it could influence political leaders everywhere, allowing “hundreds of millions of people around the world” to benefit from his presidency. “Generations of Brazilians will remember their popular president for far exceeding even the most optimistic expectations about what Brazil could achieve,” he wrote.
This was the zenith of Lula as cult figure. The following decade would deliver blow after blow to his reputation: His handpicked successor was impeached; the economy tanked; poverty soared; and a corruption scandal rocked the country, ultimately landing him in jail for 580 days.
Now, as the leftist leader inches ever closer to pulling off a stunning political comeback – almost all polls have him in front of the incumbent, the fiery nationalist Jair Bolsonaro, before the first-round vote on October 2 – investors are split into two camps: locals who loathe him and foreigners who welcome his return.
It’s a curious dichotomy. The foreigners, many of whom, like El-Erian, piled into Brazilian markets just as the rally was beginning back in the 2000s, choose collectively to remember those go-go days and the double-digit returns they were minting year after year in stocks and bonds.
(Reached by email recently, El-Erian said Lula would face challenges repeating his success at a time when the global economic outlook isn’t as favourable.)
Face of the boom and bust
The locals, who were forced to live on the ground through the grim hangover years that followed, choose to remember Lula as the convict-in-pinstripes blimp figure that protesters would fly high above rallies. Both are true. Lula was indeed the face of Brazil’s – and Latin America’s – boom, and also of its bust this century.
“Foreigners, for sure, like Lula more than locals,” says Bruno Pandolfi, a founding partner at SPX Capital, which oversees more than 80 billion reais ($23 billion) of assets. Any number of Brazilian traders plugged into the financial scene in New York and London, where Pandolfi now lives, will echo this.
The data, while not extensive, backs it up, too: Offshore investors have added about 70 billion reais to Brazilian stocks this year to September 12, excluding inflows from equity offerings, according to exchange data compiled by Bloomberg. That helped offset heavy selling by Brazilians. Domestic stock funds posted outflows of 55 billion reais in the first eight months of the year.
There’s a second, and equally important, explanation for this divergence: ESG. As investments that consider environmental, social, and governance factors grow in popularity, making up an ever greater share of money managers’ portfolios, Brazil has been somewhat left out.
Bolsonaro scares foreigners off. Lula is the opposite.
— Bruno Coutinho, chief executive, Mar Asset Management
That’s partly because Bolsonaro’s fiery comments about hot-button topics make it difficult for conscientious investors to get anywhere near the country. Over the past few years, the former army captain has mocked COVID-19 victims by pretending to have breathing problems, lamented that he had a daughter instead of all sons, railed against migration by “certain types of people”, and urged Brazilians to “use the riches that God gave us for the well-being of our population” in a bid to open the Amazon rainforest for miners.
“Bolsonaro scares foreigners off,” says Bruno Coutinho, the co-founder and chief executive of Rio de Janeiro-based Mar Asset Management. “Lula is the opposite.”
Coutinho’s playbook for a Lula presidency: Buy liquid, large-cap stocks, which figure to attract much of the foreign money that pours into the market, as well as consumer stocks, which should benefit from his administration’s push to bolster household spending.
Emy Shayo, an equity strategist at JPMorgan, sees it much the same way. She puts retailers, especially grocery stores, that cater to lower-income Brazilians high on her recommendation list if Lula wins.
Riding the momentum
Pedro Jobim, the chief economist at hedge fund manager Legacy Capital Gestora de Recursos, says the nation’s medium-term growth prospects would deteriorate significantly under Lula. He could set out to make Brazil’s development bank, once one of the world’s largest, into a powerhouse again, which could wreak havoc on the government’s fragile finances, Jobim says.
Brazil’s reform agenda – which under Bolsonaro included a pension overhaul, cutting government payrolls, and other moves designed to make the economy more competitive – would also come to a halt.
“His agenda is the opposite of the reform agenda that has been carried out,” says Jobim.
So as Brazil gears up for what could be its most consequential presidential election in years – one that will set the state’s role in the economy as it emerges from the pandemic and could determine the fate of the Amazon – the split among traders reflects the broader political polarisation throughout the country.
Lula, who has a clear, if not insurmountable, lead in the polls, draws much of his support from poorer citizens who remember the boom years. Bolsonaro is much more popular with Brazil’s upper classes, including the mostly white men who make up the core of the country’s investing community.
Not all of them love Bolsonaro, of course. Many are bothered by both candidates. One trader in Rio de Janeiro who’s not authorised to speak publicly about the election put it this way: “Every time Lula speaks, I think about voting for Bolsonaro. Every time Bolsonaro opens his mouth, I consider voting for Lula.”
But even those most disturbed by the prospect of a Lula presidency know that it might be foolish to bet against him. The foreigners see him differently – and it’s their money, not the locals’, that tends to determine the direction of the market. So, they figure, better to just ride the momentum.
— Bloomberg Businessweek
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