(Bloomberg) -- The outcome of Brazil’s election may clear up absolutely nothing, at least for markets.
Aberdeen Asset Management Plc (LON:ADNl) and HSBC Global Asset Management Inc. are neutral on Brazilian assets ahead of the October presidential vote as lingering uncertainties regarding both the political and fiscal outlooks hinder a more constructive view.
"The election itself isn’t the end of the story," said Peter Taylor, head of Brazilian equities at Aberdeen Asset Management Plc. The willingness and ability of both front-runner candidates -- Jair Bolsonaro and Fernando Haddad -- to move forward with fiscal reforms is "a gray area."
The uncertainty has HSBC recommending caution also.
"In terms of economic policies, things aren’t quite as cut and dry as the headlines would suggest," said Olga Yangol, portfolio manager at HSBC Global Asset Management Inc.
"The main challenge for Brazil is still on the fiscal side, specifically continued increases in primary expenditures due to rising pension benefits," Yangol said. "Whoever wins will need to confront this reality and demonstrate willingness and ability to tackle the issue."
A Hard Task
Tackling the country’s social security system issues has been a difficult task for leaders, as the prospect has been hugely unpopular among Brazilians. Recently, pension-reform legislation was proposed by Michel Temer’s administration and was welcomed by investors, but the bill ended up being ditched amid political opposition.
Aviva (LON:AV) Investors, based in London, is among those looking to take advantage of risk premiums to be found in the currency and local rate curves resulting from the uncertainty.
"We will be looking to take advantage of those opportunities when we feel we are well compensated for that political risk," Liam Spillane, head of emerging market debt at Aviva, said in an email. "Whilst we are happy that some of the recent rhetoric from the main candidates has been more comforting, it remains challenging to determine clear paths for Brazilian assets from here."