Famous for its stop-go reforms, Brazil has an amazing capacity to disappoint investors. Jammed together with Russia, India and China in the BRIC acronym encompassing big and fast-growing emerging markets, over the years it has proven to be just "big." The expression "custo Brasil" -- the added cost of bureaucracy, weak infrastructure and corruption for investors in the biggest country in Latin America -- has entered the business jargon, not only in the country but abroad as well.
Together with Russia, Brazil represents the commodity-exporting half of the BRICs. And like Russia -- minus the invasion of a neighbor -- it is not a pretty sight from an economic point of view right now. But investors are pushing Brazilian stocks higher today after news of the unexpected advance of Aecio Neves in presidential elections. The general Brasil ETF, the iShares MSCI Brazil Capped (EWZ), jumped by 7%.
Until very recently, it looked like incumbent President Dilma Rousseff, of the Workers' Party (PT), was sure to win. She is still ahead in the race, but the fact that she will face Neves in the second round of the presidential vote on Oct. 26 makes her victory much less secure.
The candidate of the Brazilian Social Democracy Party (BSDP) is a charismatic politician who ran the state of Minas Gerais between 2003 and 2010. He is famous for introducing the "management shock" in the state, a set of sweeping reforms consisting principally in cutting government spending by reducing bureaucracy and encouraging private investment.
If elected president, Neves has promised to apply a similar policy to release the economy from its bureaucratic shackles. In his electoral program, he says the country must reduce its deficit of competitiveness with other countries and become more anchored in the international trade.
To do this, he has promised to cut export duties, simplify the foreign trade legislation and reform the institutions in charge of product approval and certification. Brazil will look to sign trade agreements with other regions -- the U.S., Europe and China -- while the Latin American Mercosur agreement will be less of a priority.
Crucially, he expects to increase investment to 24% of gross domestic product over the next four years from less than 18% of GDP currently. In order to do this, he will open the vast infrastructure sector to private players and allow the returns expected on those investments to be set by the market, rather than by the government, as has been the case. Neves also promised to reduce regulatory uncertainties, in order to help investors in infrastructure to make longer-term plans.
On the macroeconomic front, he promised more independence for the central bank, which is currently linked to the Finance Ministry. This, according to Neves' electoral program, will lead to a cut in the inflation target ceiling to 4.5% from the current 6.5%. He also promised a primary budget surplus.
These all sound very well on paper, but Brazil is a huge country, exposed to the fall in commodity prices and with quite a lot of inertia when it comes to bureaucracy. It would not be wise for investors to expect miracles from Neves. On the other hand, the most immediate problem for Brazil has been investors' reluctance to back Rousseff, to the point where every time a poll showed her leading in voters' preferences Brazilian stocks took a dive.
So, at least for the short term, and from the point of view of investor confidence, Neves seems to have managed to change the status quo. How can you get exposure to Brazil, if you are optimistic enough to believe he will win the Oct. 26 vote and change his country?
Stephanie Link writes, for Action Alerts Plus -- the charitable portfolio she co-manages with Jim Cramer -- that miner Vale (VALE), along with other Brazilian companies such as plane maker Embraer (ERJ) and telecommunications company Telefonica Brasil (VIV), are benefiting from Sunday's vote.