Brazil ‘will be safe’ under Lula’s successor, says fund manager

Investors concerned about the results of Brazil's elections can rest easy as exiting president Lula de Silva’s expected successor looks set to continue the charismatic leader's economic growth plans, according to Invesco Perpetual’s Dean Newman.

The firm’s head of emerging market equities believes the ‘country will be safe’ in the hands of Dilma Rousseff, the candidate endorsed by the president and who was formerly Lula’s chief of staff.

Rousseff, the Workers Party candidate, failed to win an outright victory in the first round of the election yesterday meaning the election will go to a second round in which Rousseff will contest a run-off vote against Jose Serra, a former mayor of Sao Paulo, in four weeks' time.

However Rousseff remains a strong favourite to win the election.

‘We believe, from an investor’s point of view, the country will be safe in her hands,’ said Newman, who manages the Invesco Emerging Markets Equity fund. ‘Past elections in Brazil have often created a great deal of uncertainty in financial markets with volatility being compounded by the merciless negative reporting by the Western media. We saw this in 2002 when incumbent President Lula da Silva won.’

However, his tenure as president has been deemed a resounding success, Newman pointed out, bringing strong economic growth and reduced income inequality to a country of over 200 million people.

According to Newman, Dilma has indicated during her presidential campaign that she will promote many of the ‘Lulanomics’ strategies which have seen the country grow and prosper, including government support for low-income housing, government financing of student loans and further investment in infrastructure, especially in advance of hosting the 2014 World Cup and 2016 Olympic Games.

‘From a macro perspective we expect a Rousseff administration to continue to implement the reforms and adjustments necessary to satisfy financial markets,’ said Newman.

‘We expect the country to continue to pursue prudent economic policies that have brought it net creditor and investment-grade status in recent times.’

With a growth rate rivalling that of China and a buoyant domestic market which looks set to benefit from a growing middle class, Newman believes the economy will grow by 8% this year and that retailers, real estate groups and banks will continue to prosper.

What others say

Neil Shearing, senior emerging markets economist at Capital Economics, says that Brazil should continue to prosper regardless of who wins: 'It is widely acknowledged that both Dilma and Serra remain committed to maintaining the holy trinity of economic policy in recent years – inflation targeting, a floating exchange rate and sizeable primary fiscal surpluses. This would be enough to secure growth of 4% or so a year,' Shearing said.

However, Stephen Lewis of Monument Securities warned last week that Lula's exit will mean the 'sky-high' confidence in Brazil's future will be undermined, whatever the result of the election. 'His will be a hard act to follow, at a time when Brazil will be facing the problems of success,' Lewis wrote. 

'Chief among these, unless the currency’s ascent can be restrained, might be an outbreak of so-called ‘Dutch disease’, the process whereby a country with a substantial trade surplus, based on commodity exports, and a consequently appreciating currency loses manufacturing competitivenes,' according to Lewis.