The strong showing by presidential candidate Aecio Neves has been the main surprise in the first round of the Brazilian election with third placed candidate Marina Silva now removed from the process.
The Bovespa index was up 7.5% in the first few minutes of trading on Monday, mainly on the belief that the opposition had a real chance of winning and introducing more business-friendly policies.
Neves will go head to head with incumbent Dilma Rousseff on 26 October, with many branding it a straight choice between a pro-business challenger and the more interventionist Rousseff.
Citywire Global canvassed opinion from emerging market managers and specialists on how they interpreted the first round of the Brazilian presidential election and what it meant for markets.
Hopes for reform with Neves
Hermes head of emerging markets Citywire AA-rated Gary Greenberg remains cautious ahead of the second electoral run off, although he believes the picture has become clearer after Marina Silva's removal from the race - and raises the possibility of a Modi-style win for Neves.
He told Citywire Global: 'Aecio Neves did surprisingly well in the first round, knocking Marina Silva out of the race and creating a clear choice between business as usual (with a Dilma win) and reform. A Neves victory would be a strong positive for Brazil, not unlike that of Modi for India. But it is far from a foregone conclusion.
'Neves represents a much deeper and more positive prospect for reform than did Silva. However, the calculus is delicate. We remain cautious because many of Silva’s followers consisted not only of those opposed to Dilma Rousseff; many, perhaps a majority, supported her because of her radical, environmental stance; it is just possible that pro-business Neves will win over a majority of them, but this is far from certain at this point.
Markets buoyed by challenge to Rousseff
ING's Marco Ruijer, who runs the ING Renta EM Debt fund, thinks the fact that Rousseff gleaned less votes than was initially expected will have encouraged markets in the run up to the second round at the end of October.
'All in all, the second round looks like it will be a close call and the market will have to price this. So we can expect Brazilian equities, bonds and the currency to perform well in the short term.
'A Dilma victory would push Brazil into more trouble, with possibly credit rating downgrades, a weaker currency and struggling growth but a Aecio victory would give a large confidence boost to the economy and market. He will bring in the people that were also involved in the reformist government of Fernando Henrique Cardoso.'
William Calvert, global emerging markets manager at Polar Capital, said Silva's support would be the crucial factor in who would win.
'Marina’s support will be critical to the outcome but it will still be hard for Neves to get above 50%. Nevertheless the market is cheering the result with ETFs up close to 8% in Europe.'
Time for business reform
Anna Stupnytska, global economist at Fidelity thinks the market may continue to rally at the possibility of a victory for Aecio Neves.
She said: 'For some time, Neves seemed like a long shot, with the leftist President Dilma Rousseff looking hopeful of securing a second term. But a pre-vote poll on Friday changed the mood, with voters for the first time indicating stronger support for Neves, which may have helped him when Brazilians went to the ballot boxes on Sunday.
'Neves’ strong pro-business stance would likely be welcomed by investors, giving Brazilian companies the reform and support they badly need, and that they have lacked for some time. Brazil has a long way to go in terms of structural reform, but Neves’ significant political footprint would likely be helpful in building a government committed to this change.
Robeco emerging markets portfolio manager Daniela da Costa Bulthuis also believes the prospect of the opposition party winning the second round is growing, especially if third -placed candidate Marina Silva, puts her weight behind Neves.
She said: 'In 2010 Dilma had more votes in the first round (47% against 42% now), the economy had grown 7% in 2010 while in 2014 Brazil will grow less than 1%. At the time, Marina declared neutrality while now she may support the democrats.'
'To the opposition's advantage, they will have now equal television time as President Dilma in the second round, while Dilma had more TV time in the first round because in Brazil, whoever has the biggest coalition has more TV time in the first round of elections.
She added: 'In addition, the corruption problems at Petrobras, the low business and consumer confidence and the weak economic growth numbers also work in the opposition's favour.'