Brazil reelection of Dilma spurs doubts about economic reform

Rio de JaneioroBrazil's left-leaning president, Dilma Rousseff, has been re-elected for a second term, winning 51.6% of the vote in Sunday's election.

Paul Locke, analyst for Westhouse, a stock broker, anticipates a further sell-off in assets such as equities, debt and the Brazilian real in the short-term, following the election result.

"Yesterday's results are hardly likely to endear the market to investors in terms of prospects for economic reform or lifting a fairly stale rate of growth in the economy," he says.

From a fund perspective, he says UK-listed closed end funds with exposure to the region were already expensive and may underperform the market in the short-term.

"Investors seeking exposure to the country/region might wish to consider accessing a Brazilian ETF in the short term, to maximise gains from any market rebound that does occur in the days ahead," he says.

Schroders' emerging markets economist, Craig Botham, also sees the result as a disappointing one for investors, postponing the hope of reform to address Brazil's structural economic problems.

He says: "A marked change of course in policy seems unlikely under Dilma. Though the president has claimed she will address macroeconomic concerns, we have heard these promises before without seeing matching policy action."

Botham says the more likely outcome is that Dilma will only make significant changes under extreme pressure from the market.

"Policy may improve slightly at the margin, but by less than is needed, or would have been delivered by opposition candidate Aecio Neves. Dilma has, for example, ruled out greater autonomy for Brazil's central bank," he says.

Though the result has not changed Schroders' forecast for 2015 growth, which was already expected to be weak whoever won, Botham says the longer-term outlook may now be worse.

"The only immediate positive from Sunday is an end to uncertainty and volatility; the market knows now to expect more of the same, however bad it may be," he says.

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