Brazil has elected Jair Messias Bolsonaro as its next president, with Hamilton Mourão serving as vice-president. The PSL – Social Liberal Party – led by Bolsonaro won the second round of voting with 55.1%, compared to 44.9% achieved by Fernando Haddad of the Workers’ Party. Bolsonaro also led the field in the first round of voting, with many of the left and centre votes split across a multitude of political parties.

Bolsonaro, a far-right candidate in this election, is somewhat ironically representing the Social Liberal Party. Despite the name, these are an anti-establishment political party focussing on a mix of pro-market policies but also social conservatism – something Brazil hasn’t seen in the last 16 years.

The 63-year-old is a former army captain will be the 38th President of Brazil. He has been on the political circuit as a congressman in Brasilia, the country’s capital, for two decades. He was seen as an outsider – a joke of a political character – and this bought him the freedom to make controversial statements about race, gender, and sexual orientation.

Bolsonaro’s PSL ran a campaign promising to tackle growing crime levels in Brazil, but also to expose and remove corruption in political circles – corruption which saw the impeachment of former president Dilma Rousseff (which Bolsonaro voted for) and the jailing of her predecessor, Lula da Silva.

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The Market Reaction:

Brazilian stocks rose sharply on Monday morning following the election result, with the Índice Bovespa (IBOV) stock index rising 3.1% to a record high of 88,377. Share values have fallen back slightly and today the IBOV stands at 86,885, but the figure is still near a 3% increase and indicative of market support for Jair Bolsonaro.

This quote by FXTM currency strategist Jameel Ahmad, reported in The Street, neatly explains investor sentiment toward Bolsonaro despite political scrutiny.

Bolsonaro is seen as a far-right candidate but he has campaigned strongly for fiscal and government reforms to improve the outlook for the Brazilian economy, which represents something that we can expect investors to buy into. Some of the reforms that Bolsonaro has pledged might not be as easy to implement as what will be priced into the Real right away. But he is seen from the standpoint of the financial market as a "Donald Trump" type that pushes pro-growth policies, and this is overall seen as a positive outcome for the Real.

Investors have been taking into account Brazil’s imminent oil windfall, with Bloomberg journalist Sabrina Valle reporting that Petrobras’ oil output will rise by between 9% (UBS) and 12% (Morgan Stanley) in 2019, at a time where Brent crude prices are above $70 per barrel, and output will double within a decade. Bolsonaro has also promised to help the ethanol industry grow, against the advice of environmental experts and campaigners.

One potential stumbling block for Bolsonaro may be the country’s dealings with China. In March Bolsonaro toured several nations in Southeast Asia, but did not visit China, remarking that Brazil needed to move away from being “friendly with communist regimes”. The Chinese authorities issued a rebuke then and there’s the risk that China could hold a grudge; a big problem considering China is Brazil’s biggest trading partner (since 2009) and Brazilian exports are worth $47 billion – more than double their exports to the USA. Such a move may earn Bolsonaro favour with President Trump though, and shift Brazil’s trade north rather than across the Pacific.

Another problem for the PSL to overcome will be the weak Real. The US Dollar’s strength has put pressure on many currencies, including neighbouring Argentina’s Peso, and Bolsonaro campaigned to bring the gap between the Real and the Dollar closer once more. The current rate of USD/BRL is 3.7. ING are forecasting a reduction to 3.5 in the near future but see little change between these two figures while the PSL establishes its government, with ING citing the broad congress and some unpopular initiatives as potentially hindering progress, in turn weighing on local assets.

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Brazil and Bullion:

Brazil’s relationship with gold is unusual. It is currently in a recession, which is usually a popular time to protect wealth and buy gold, but given the weak Real vs the US Dollar, and gold is priced in Dollars, gold bullion is proving expensive for Brazilians.

If the Brazilian Real increases in value, more people will be able to afford gold, but public demand will depend on the Brazilian Central Bank. Brazil currently holds 67.3 tonnes of gold bullion in reserve – the least of any of the BRICS nations. If the bank shows a willingness to buy gold for reserves, then people will follow their lead, but if not, then people will stick with the Real.

Hungary, a fellow right-wing government, recently increased their reserves tenfold from 3.1 tonnes to 31 tonnes. Gold reserves can act as an anti-establishment safety net, meaning less influence and more independence from groups like the World Bank and the International Monetary Fund.

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The rise of Bolsonaro:

Similarly to the USA and Italy, the people of Brazil wanted change. Operation Car Wash, an investigation running in Brazil since 2014, had uncovered corruption amongst the political leaders of the country – many of whom belonged to parties on the left wing – and it is this, coupled with the PSL’s promise to stabilise the Brazilian Real and end austerity that helped convince the middle classes to back a far-right party.

Jair Bolsonaro is a divisive figure, and his campaign promises have exaggerated the rich/poor divide in Brazil. Estadão, a daily newspaper in Sao Paolo, reported national results from the election matched against data from the Human Development Index (HDI) which showed that Haddad won in 98% of the poorer districts, while Bolsonaro won in 98% of the richer ones – a clear class and wealth divide within Brazil.

Despite congratulations from fellow leaders for a clean and fair election, there were many reported instances of the police intervening to stop protests against Bolsonaro and to disrupt rival political rallies, with video evidence of heavy-handed policing towards Workers’ Party (PT) members.

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Courting controversy:

Jair Bolsonaro is not a man who minces his words. Over the past 20 years he has made many controversial statements, ranging from racism (he said his son was brought up better than to marry a black woman), to comments about raping a fellow politician, and his anti-LBGT+ stance; the latter of which saw Bolsonaro meet Stephen Fry for a TV documentary and say: “We, the Brazilian people, don’t like the homosexuals... In Brazil, we are not ready yet because no father is proud of having a gay son.”

More recently he has talked about a cleansing in Brazil, speaking on national radio over the phone and saying “It will be a cleansing never seen in Brazilian history” whilst promising prison or exile for his political opponents. It’s no secret that the former army captain favours military rule, even dictatorship, as was the case between 1964 and 1985. His campaign promises include plans to relax gun laws, the reintroduction of torture for the security services, and stronger police power to arrest and even kill.

Indigenous tribes and the Quilombola people are also under threat from president-elect Bolsonaro, who has said he wants to sell off all indigenous lands – approximately 13% of Brazil’s territory – to logging and farming companies, with Canadian logging firms particularly keen to invest in said projects. The environmental damage would be significant, on top of displacing thousands of Amazon natives, but Bolsonaro’s response? “Minorities have to adapt to the majority or simply disappear”.

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Following his election win, Bolsonaro was inundated with messages of congratulations from fellow world leaders including Donald Trump, Benjamin Netanyahu, and Emmanuel Macron, as well as receiving praise from footballer Lucas Moura and Formula 1 driver Felipe Massa.

Speaking to the media and supporters, Bolsonaro said: “This government will defend the constitution, democracy and liberty. This is a promise not of a party, not the empty words of a man; it’s an oath before God”.

The big hurdle for the Social Liberal Party will be the population of Brazil’s Congress, with 52 seats for the ruling PSL but 56 for PT and a total of 30 parties across the parliament. The variety and quantity will make negotiations difficult and laborious, which might increase the risk of increased military control to bring about a swifter legislation process.

Bolsonaro will be sworn into office and begin his presidency on January 1st 2019.