Following the vote for Scottish independence, the global media spotlight is now shining on Sunday’s presidential elections in Brazil. In fact, the unfolding poll drama in the largest country in South America is pulling eyeballs from around the globe.

Markets Move on Vote Outlook

For the past few months, Brazil’s equity market has been riding the election wave. When the polls show voter support for incumbent Dilma Rousseff, markets sell off, while improving prospects for opposition candidate Marina Silva sends the iBovespa index higher.

Therefore, quite expectedly, the Brazilian stock exchange stumbled more than 4% on Monday following positive news for Dilma Rousseff. Latest polls indicate that the serving President has widened her lead over rival Marina Silva.    

Candidates’ CV

In this Latin American nation, leftist President Dilma Rousseff has come under heavy criticism for Brazil’s dismal economic performance under her leadership, highlighted by recession and increasing inflation. Therefore, her re-election is perceived as the extension of this ‘stagflation’-like situation.

On the other hand, Brazilian Socialist Party presidential candidate Marina Silva is seen as increasingly pro-industry, thereby preferred by investors. The business community is hopeful that her win would not only attract more capital to the country but more importantly, reduce the state intervention in company affairs.

Stocks to Watch

From electric utility Centrais El EBR to financial services provider Itau Unibanco Holding S.A. ITUB, to iron-ore producer Vale S.A. VALE, there are a number of Brazilian equities which would be affected by the fate of the upcoming vote.

However, the one most exposed to the outcome of next month's general election is state-run energy giant Petrobras PBR.

Petrobras: Outlook Tied to Election

Headquartered in Rio de Janeiro, Petrobras is the largest publicly-traded Latin American oil company, dominating Brazil’s oil and gas sector. It produces substantially all of Brazil’s crude oil and natural gas, accounts for almost all of the country’s refining capacity, is building the country’s natural gas infrastructure and enjoys strong market share positions in the petroleum product and liquefied petroleum gas marketing businesses. While the company no longer operates as a legal monopoly, the size and reach of its operations make it a quasi-monopoly in Brazil.

However, the Brazilian government, the company’s majority shareholder with a 54% stake, has a history of political interference in Petrobras’ affairs. As a result, despite the company’s expertise in deep-water operations, its huge recent discoveries and increase in oil production, Petrobras routinely incurs losses.

In particular, while the upstream business is doing fine, the downstream segment is a drag on the overall results. The government caps the prices of domestic refined products so as to meet the needs of the people. These price regulations do not allow Petrobras to pass high refining costs to consumers.

A win for Marina Silva is construed as a less restrictive environment for the beleaguered Petrobras, which is also battling accusations of political kickbacks. With a change of administration and the resultant end to the previous government’s populist policies, the company is likely to be allowed to raise domestic product prices, thereby helping it to make larger profits and generate sufficient cash.  

But with recent polls showing Dilma Rousseff extending her lead over Marina Silva, Petrobras ADRs are on a freefall. The thought of her reelection has pushed down Petrobras stock more than 10% on the NYSE over the last few days and around 25% over the past month.

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