PBR and VALE, and the entire iBovespa, have experienced wild mood swings in recent weeks as Brazil's Presidential election has proved too complex for many to predict. In many ways these and other stock hinge on the outcome of this election. These recent swings have shown us that any perceived weakness in incumbent Dilma Rousseff, results in positive market movements.
For those hoping to make wise investment decisions, I will explain why the hype is way overplayed and why this election is not nearly as complicated as people have made it out to be.
PBR has risen from 13.97 to over $17 since Oct 6, the day after the first round of the election. More business friendly Aecio Neves emerged to faceoff against Dilma Rousseff. Allegations of corruption, including 3% bribes paid to Ms. Rousseff's Workers Party (PT), have tainted the image of the company somewhat but investors have mostly shrugged this off.
External investors trying to make a long play on this should remain cautious for a couple critical reasons:
- The weekend poll which showed 15.3% margin favoring Neves should not be taken seriously. It was conducted by Sensus, which is owned by Mr. Neves ex-Vice Governor who resigned from the Senate this year to avoid prosecution for past corruption.
- The investment community in Sao Paulo has shown a bit of irrational exuberance on any news that Dilma may lose. I noted this in early September in an Oxford Analytica piece when markets were betting heavy that Marina Silva would win.
A short play is more wise in this type of situation, as stocks will decline as new polls coming out this Thursday and Friday will show a much tighter race.
For the past couple months each increase in the market price has preceded a decline as new, and often more accurate, information dashed the previous days expectations.
An over eager investment community in Sao Paulo, which favor any candidate other than Rousseff, is somewhat blinded to this rule: incumbents win elections in Latin America.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.