Brazil’s elections unnerve investors

Brazil, like other emerging markets, has hit turbulence following the collapse of the Turkish lira. The Brazilian benchmark Ibovespa has slipped by 6% over the last two weeks. The last thing Brazil needs right now, however, is an emerging-market panic.

It experienced its worst-ever recession in 2014-16 and is only recovering haltingly. To complicate matters further, it is in the middle of an election campaign that is starting to make investors nervous. A new president will be chosen in October.Brazil's economy would be best served by dull but disciplined leadership, says Martin Langfield on Breakingviews. The best candidate appears to be Geraldo Alckmin, a Social Democrat, and a former anesthesiologist and governor of Sao Paulo state. "Though something of a snooze, he's a pro-business centrist who would stand the best chance of getting the country's fiscal house in order."

A motley crew

Brazil's high interest rates mean that the government wastes much of its tax revenue on its creditors. This suits banks and wealthy Brazilians who have savings, but not the general population. "A dose of tough love is definitely what the economy needs," says Joe Leahy in the Financial Times. Meanwhile, among those leading in early polls is left-leaning former President Luiz Inacio Lula da Silva. His widely admired social programmes lifted millions out of poverty during his presidency's commodity boom. But he will most certainly be barred from running as he is currently in jail.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Then there's far-right candidate Jair Bolsonaro, who is reminiscent of Donald Trump, Recep Tayyip Erdogan and the Philippines' Rodrigo Duterte thanks to his sexist off-the-cuff remarks, xenophobia and pro-torture leanings. While 60% of Brazilians say they will never vote for him, "there is no room for complacency", argues The Economist. Other countries with Brazil's "mix of crime, elite failure and economic agony" have elected radicals.

Worryingly, Bolsonaro has said he knows nothing about economics nor does he think he needs to. "Am I going to a university entrance examination or a political campaign?" he asked a local newspaper. Brazil's overgenerous and unjust pension system needs to be reformed, says Leahy. This is key to getting state spending and debt under control. But Bolsonaro won't deliver on that. Alckmin, whose Social Democracy Party enjoys wider congressional support, is more likely to get these much-needed pension reforms passed, argues Langfield. But the race for the second round's two candidates slots promises to be tight, and "the man Brazil most needs might not make it".

What shrank the stockmarkets?

The global equity market is shrinking at the fastest pace in two decades. Both the overall volume of companies going public is decreasing while companies are simultaneously buying back their own shares.

US companies have been particularly hyperactive buyers of their own stock, according to Robin Wigglesworth in the Financial Times. Chalk that up to the earnings boost brought about by corporate tax cuts and the strong economy. The overall volume of US buybacks is set to reach a record-breaking $1trn in 2018, estimates Goldman Sachs.

Meanwhile, companies in the UK, Europe and Japan are also aggressively repurchasing their shares. They're doing so at a faster pace than new companies are issuing shares or older ones are raising further capital through secondary share issues. "The increase in stock buyback activity globally has coincided with subdued equity issuance activity," notes Inigo Fraser-Jenkins, a senior analyst at Bernstein.

Apple repurchased $43.5bn of its own stock during the first six months of this year. These repurchases rank as the biggest in history for a half-year, Howard Silverblatt of S&P Dow Jones Indices told The New York Times. Buybacks artificially boost the stock price. Corporate executives benefit most from this ploy because in contrast to most workers their compensation is closely tied to the stock's performance, says Drew Hansen on Forbes.