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Optimism After Court Ruling on Former President Lula

February 3, 2018

 

 

(Debora Toledo is involved with business intelligence at Doral  Investimentos, an asset allocation advisory company based in Rio de Janeiro, serving private and corporate clients.)

 

After the decision of the Court condemning former president Lula, the market has entered a wave of optimism with a high valuation of Brazilian assets. After the condemnation, the BOVESPA rose 3.7 %, Brazil currency rose 2.8 % and preset interest fell by 28 basis points.

 

However, there are doubts and many wonder if this higher level will remain or if it was just a case of a particular optimism in the market.

 

To clarify this point, it is said that Lula was the candidate who had the most chance of being elected in the presidential race of 2018.

 

With this conviction, the former president may not be able to run. According to a new law in force to combat corruption "Lei da Ficha Limpa", politicians convicted in second instance are ineligible for a period of eight years. This fact represents a structural break and the certainty that there will be changes to populists of the "Lula Era", which could change the direction of the current economic policy in the coming years.

 

In this way, the red wave that existed in South America in recent years has suffered a further sharp fall. This time Brazil has eliminated the chance of a populist control of the country, increasing the likelihood of a more liberal and reformist president, as occurs in Argentina today.

 

The financial market has responded positively. Now there is a positive trend that the country will solve the problems of tax, social security, and other issues.

 

This structural change was a stimulus for the market to bet on a better Brazil. Foreign investors are more confident and will look to invest in a "new" Brazil, increasing the flow of capital from abroad; a movement similar to that which occurred in 2008.

 

Of course the "Lula" event does not interfere with the inflation and the pace  of the economy in the short term. It just changes the scenario in the long term. However, there is an increased likelihood that the Central Bank will promote a lower interest rate and reduce short term interest.

 

To conclude, it is important to remember that customers who have a diversified portfolio or who changed their investment portfolio beyond the fixed income funds, are celebrating the financial market in the new Brazil after the "Lula era".

 

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