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Emerging Markets: Commodity cycle could be well timed for Brazil investors

The global commodity cycle could be beneficial for Brazil investors despite concerns over a looming election, says Pendal’s PAUL WIMBORNE

A LOOMING election is occupying the minds of Brazil investors but the real key to the country’s prosperity is the global commodity cycle, says Pendal’s Paul Wimborne.

Brazil’s powerful agriculture, energy and mining sectors have been among the world’s big economic winners from the supply squeeze in 2022. Consensus estimates for GDP and earnings growth have been revised upwards in the first half.

But with an election due in October between candidates from opposite ends of the political spectrum, markets are starting to get nervous about the ramifications of a change of government.

The most likely outcome of the two-round presidential vote is an October 30 run-off between the incumbent, populist right-wing president Jair Bolsonaro, and former president and head of the left-wing Workers Party, Luiz Inácio Lula da Silva, who is leading in the polls.

“There’s two main risks the market is worried about,” says Wimborne, co-manager of Pendal Global Emerging Market Opportunities Fund.

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Pendal Global Emerging Markets Opportunities Fund

“The first — which we are less worried about — is that Bolsonaro is already questioning the electoral system and setting the groundwork for a potential challenge.

“He is from a military background and his government has the support of the military. But we think Brazil’s institutions are strong enough to withstand any challenge.

“The second big risk that markets are pricing in is that Lula wins the election.”

When da Silva was last elected president in 2002, markets sold off sharply, fearing a big spending, left-wing agenda.

“Lula was seen as a hard-left candidate, but moved centre-left when actually took office,” says Wimborne.

“A large part of that was the timing of his presidency. His two terms in office, from 2003 to 2011, coincided with a commodity super-cycle that boosted export conditions for Brazil and provided him with a sound base to increase welfare spending and increase spending on social projects.

“It was an incredibly successful period for Brazil where they dramatically improved the lives of tens of millions of ordinary Brazilians.”

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The next commodity super-cycle

Ironically, a similar story may play out again in 2022.

“We think that if Lula is elected, the commodity cycle could once again determine how much spending power he has and how successful his government will be.

“He will want to spend more on improving the lives of the lower classes in Brazil and whether he has that spending power will be determined by the export conditions and the commodity cycle.”

Right now, things look helpful.

High prices for energy, agricultural commodities and iron ore are boosting Brazil’s export earnings and lifting government tax revenue.

“It’s too early to say, but it may well be that if Lula is elected he could once again be very fortunate in the timing of the commodity cycle.”

About Paul Wimborne and Pendal Global Emerging Markets Opportunities Fund

Paul Wimborne is a senior portfolio manager and co-manager of Pendal’s Global Emerging Markets Opportunities Fund with James Syme and Ada Chan.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

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This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current at August 3, 2022. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.

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