In the run-up to the presidential elections in Brazil, the lead candidate with 36% of votes in a recent poll (Datafolha, November 2017), Luiz Inácio Lula da Silva (better known as simply “Lula”), lost an appeal at a federal court to clear him from charges of corruption and money laundering. The stock market jumped by 3.7% on the news as investors heaved a sigh of relief that this left-wing cheerleader was dealt a final knock-out by the courts. Candidates whose convictions are upheld by an appeals court are barred from running for president (ironically, a law that Lula himself approved in 2010). However, this being Brazil, there is always another hurdle to take: in this case, only the Supreme Electoral Court can prevent Lula from running as presidential candidate for the third time. It is likely that the court will do so but they only can act once Lula registers. As the appeals court forgot to lock him up (probably fearing country-wide street protests), we believe that Lula will continue to fight and thereby will have an impact on the elections, whether he is eventually allowed to run or (more likely) not. Lula is still admired by many people (fondly remembering his generous hand-outs when Lula was president from January 2003 to January 2011), especially in the poorer north-east of the country. He is a gifted speaker and can arouse enthusiasm with big crowds. Candidates may resign and be replaced during the campaign, up to 60 days before the first round. Lula will avoid registering as candidate as long as possible to prevent being tossed out by the Supreme Electoral Court. The longer Lula can tour the country, the bigger uplift his replacement will enjoy from Lula’s popularity. Lula certainly will play up his belief that the verdict is a political maneuver of the sitting president Michel Temer and his PMDB party (we would have some sympathy with this view, were it not for the fact that large corruption cases, like the Mensalão vote buying scam, were unearthed during Lula’s reign as president), polarizing the country’s voting base.

Lula waves goodbye…

Although we certainly are not in favour of Lula as Brazil’s next president, given the likely detrimental economic policies he might pursue (e.g. not reforming the overgenerous pension system and reining in government expenditures), the runner-up in the polls, Jair Bolsonaro with 18%, is equally scary. Although this carioca has wandered round the corridors of Congress in the past 26 years, Bolsonaro frames himself as the incorruptible anti-establishment candidate. He is a former army parachutist, openly admiring the military dictatorship of 1964-1985 as well as Alberto Fujimori, and a conservative evangelist who believes his children will never be gay because they are too well-educated. Bolsonaro is running a Trumpian election campaign with the slogan “Brasil acima de tudo, dues acima de todos” (Brazil above everything and God above everyone). Bolsonaro easily beats Trump when it comes to insulting people, whether they are gay, women, quilombos or refugees or those that simply have a different political or religious view. He loves cattle ranchers though, promising to free up more land in Amazônia. He dedicated his impeachment vote against Dilma Rousseff to Carlos Ustra, a torture specialist during the dictatorship. His policies can be summed up as Triple B: Bullet, Beef and Bible.

More sensible candidates, like Geraldo Alckmin (the centre-right governor of São Paulo and one of many candidates for the PSDB), Ciro Gomes (a demagogue affiliated to the smallish PDT who served in Lula’s first government) or Marina Silva (on the left) are trailing, the polls indicating 10% or less of the votes. One problem is that the parties in the centre don’t have a clear leader. For example, Alckmin has to fight off João Dória, mayor of São Paulo and a kind of Trump Junior (for many years with his own TV program styled on “The Apprentice”), although with more palatable economic policies. However, Dória is a polarizing figure, even within his own party, with at times awkward ideas (like feeding São Paolo’s poor people with farinata, pet food made from expired staple food like pasta). Temer’s PMDB party doesn’t seem to have a leader (the unpopular Mr. Temer promised not to run, although promises don’t mean much in Brazilian politics) as nearly everybody is involved in the Java Lato corruption case or already in jail. Finally, there are wild-card candidates, unaffiliated with parties, like Luciano Huck (a TV host celebrity with brains) and Joaquim Barbosa (the former chief justice of the Supreme Federal Court but with the handicap of being black) of which Huck seems the more promising candidate given his popularity.

Our assumption is that Lula, if not jailed, and Bolsonaro will run a divisive, polarizing campaign where Lula has to drop out in the summer in favour for a heir apparent (Fernando Haddad, possibly). Both Lula and Bolsonaro have a strong following but very limited appeal outside their voting base. Candidates from the centre will struggle as most of them are tarnished by Lava Jato and have little appeal with angry voters. So, a surprise candidate, like Mr. Huck, might upset the establishment. Problem is that little is known (yet) about their policies and views.

To the highest bidder…

Markets are too lenient, in our view, and have not priced in political risk (generally believing Alckmin will prevail), although we do know that polls in Brazil do not always have much predictive power. The first round of the elections will be held on October 7th. A candidate with more than 50% of valid votes wins. Otherwise, there will be a run-off between the winner and runner-up on October 28th. Let’s hope that the next inhabitant of the Palácio do Planalto will be incorruptible and will implement the required economic and structural reforms to set Brazil on the path of prosperity.