Brazil Election Brings Uncertainty

The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking stocks in Latin America’s largest economy, has recently been surging as the first round of the country’s presidential election looms. Still, EWZ is lower by 18.50% year-to-date, making it one of the worst-performing single-country emerging markets this year.

Some analysts and market observers believe the election, slated for October, could bring undesired uncertainty regarding Brazil’s fiscal and structural reforms.

“Brazil’s forthcoming presidential and congressional elections will be key for determining the pace, scale and nature of future fiscal and structural reforms,” says Fitch Ratings. “Without sustained reforms, fiscal deficits will remain high and government debt dynamics adverse, further weighing on broader investor confidence and economic activity.”

Election Impact

There are several reasons why the upcoming Brazilian elections are relevant to local and foreign investors.

“The results of the election will set the medium-term backdrop for economic and fiscal policy, with multiple presidential candidates across the political spectrum advocating markedly varied platforms,” according to Fitch. “Close opinion polls and a two-round electoral process for the presidency make the outcome unpredictable, with multiple potential policy scenarios. A fragmented Congress and potential difficulties in forming a workable legislative coalition could also add to political uncertainties under the new administration. Notably, some of the leading candidates belong to smaller parties, which may add to challenges in working with the new Congress.”