Brazil's presidential race seems to tighten; markets show slight preference for challenger Serra

10/19/2010 6:48 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The race for president of Brazil continues to tighten.

Probably. At least the financial markets have started to react as if the challenger actually stands a chance.

The vote comes on October 31.

In a Vox Populi poll released on October 13 Dilma Rousseff, candidate of the ruling Workers’ Party running with the backing of outgoing president Luiz Inácio Lula da Silva, had 48% of the vote to 40% for opposition candidate Jose Serra. Dilma, as she’s known in Brazil, won the first round of voting but was forced into a runoff with Serra when she failed to achieve a majority of votes.

A Sensus poll puts the race closer giving Dilma only a 4.6% lead.

The difference in the polls? The Vox Populi poll dates from a survey conducted on October 10-11. The Sensus poll is slightly more recent, dating from October 11-13.

A newer Vox Populi poll released on October 19 puts Dilma’s lead back at 51% with Serra at 39%.

What’s the difference in the Vox Populi and Sensus polls? Polls from Vox Populi have consistently given Dilma higher numbers.

My conclusion is that the race will go down to the wire. Even if Dilma pulls it out—and that’s the most likely outcome—the tightness of the election is itself surprising since Dilma was initially seen riding to an easy victory on Lula’s immense popularity.

The financial markets aren’t troubled by the closeness of the polls or the possibility of a Serra victory. The Bovespa stock index is up about 1% since the first round of voting. Both candidates support the three pillars that are seen as the key to the country’s economic prosperity under Lula:  a floating exchange rate, inflation targeting, and fiscal restraint.

If the financial community has a preference on policy, it probably tilts slightly to Serra. The opposition candidate has said he wants to reduce Brazil’s public sector and Dilma favors expanding the government’s role in key economic sectors such as the oil industry.

And this preference has started to show up in the markets with stocks of Brazil’s big utilities rising on investors’ belief that Serra will exert a lighter hand on regulation and be less inclined to expand the state’s role in the economy than Dilma. Yields on Brazil’s interest-rate forwards have fallen on investor’s conviction that Serra would be more likely to cut (or at least moderate increases) in public spending than Dilma and that would bring interest rates down over time. Serra has repeatedly said that he thinks the Brazilian real is overvalued and that translates into the market’s belief that he would intervene to weaken the real if elected.

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