News

Much is at stake in Brazil’s forthcoming election: a possible shift to the right in Latin America, allegations of corruption and the great-power rivalry between the United States and China. “Ultimately, however, the economic situation is likely to prove decisive,” comments Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM. Yet the economic outlook is becoming increasingly precarious. What investors need to watch.

On 4 October, Brazilians will elect their next president. Broadly speaking, the contest is between two candidates: incumbent Luiz Inácio Lula da Silva and his challenger Flávio Bolsonaro, the eldest son of former president Jair Bolsonaro, who is under house arrest over an attempted coup. Jair Bolsonaro is barred from standing, prompting the political right to nominate his son Flávio. A Bolsonaro victory would leave the right in power across almost all of South America, with only a few exceptions.

Donald Trump’s endorsement has so far done little to help him, however. The US president is backing Bolsonaro, as is Argentina’s president, Javier Milei. “Foreign support could backfire on Bolsonaro,” Fischer explains. Lula, meanwhile, is using Trump’s intervention to portray himself as a defender of national sovereignty and the Global South. He is demonstratively drawing closer to China, Russia and Iran, which, like Brazil, belong to the BRICS group of countries.

As recently as August, prediction markets put Lula clearly ahead, with a probability of victory of around 67 per cent. Since then, however, the tide has turned: on the Polymarket prediction platform, Bolsonaro is currently the favourite, while Lula has fallen behind. “Bolsonaro is benefiting from growing fatigue with Lula’s Workers’ Party,” Fischer explains. Another factor, he says, is that parts of Brazilian society have become more politically conservative in recent years.

But Bolsonaro also faces a mobilisation problem: he is struggling particularly to win over female voters and is finding it difficult to unite the entire political right behind him. At the same time, controversies and the polarising Bolsonaro name mean that, like Lula, his rejection ratings remain high at around 50 per cent. “Many Brazilians are therefore likely to vote less out of enthusiasm than on the basis of choosing the lesser of two evils. The race remains open,” says Fischer.

Ultimately, neither geopolitics nor questions of political direction are likely to decide the election. Instead, the economic situation may prove decisive – something whose central importance is currently evident in many countries, from the US midterm elections to Germany’s state elections. “Inflation, purchasing power, the labour market and public safety could matter more to Brazilians than political ideology,” Fischer says.

On the economic front, Lula currently benefits from low unemployment and falling poverty rates as a result of targeted spending programmes. Social benefits were increased again shortly before the election. At the same time, however, the question is how long this expansionary fiscal stance can be sustained. Public debt is rising, while the central bank is combating inflation through higher interest rates, which in turn weigh on growth and increase the debt-servicing burden on Brazilian households. Both candidates are promising spending cuts after the election. The question is how credible such pledges will prove to be.

What does this mean for investors? For now, the overall economic situation remains favourable. Latin America – particularly Brazil and Argentina – is benefiting from more stable macroeconomic conditions and robust commodity markets. “Brazil remains an attractive investment destination thanks to its natural resources, its large domestic market and its importance within emerging markets,” Fischer comments. In the short term, however, the election is likely to increase volatility in Brazilian equities, bonds and the local currency, the real. “The decisive factor,” Fischer says, “will be less the name of the election winner than their economic agenda.” Fiscal discipline, a willingness to pursue reforms and a reliable framework for private investment will remain the key considerations for international investors.