(Bloomberg) -- Even though he is in jail, former Brazil President Luiz Inacio Lula da Silva may still shape the outcome of the presidential race in October.
And that has Mark Mobius wary that the country might turn away from structural reforms that helped bolster the market.
“My current view on Brazil might best be described as ‘concerned’ that the movement for total government reform could slow as a result of the continued popularity of Lula and his supporters,” said Mobius, who left Franklin Templeton Investments earlier this year to set up Mobius Capital Partners LLP. “This could result in a slackening of the reform movement or even its end.”
The caution from Mobius, 81, is significant: He spent decades at the forefront of emerging market investing and led one of the first emerging market equity funds available to U.S. customers. He’s also not alone in holding that concern. Supporters of Lula are likely to flock to any candidate he backs, potentially leading that name to the second round of the election, Christopher Garman, Eurasia Group’s director for the Americas, said last week.
The relatively weak polling of candidates who are interested in pushing forward reforms, including trimming social security, is also a worrying factor. Among those failing to impress is former Sao Paulo Governor Geraldo Alckmin, while far-right ex-army captain Jair Bolsonaro and leftist former Ceara state Governor Ciro Gomes are leading.
“This is a real problem and heightens the political risk,” Mobius said in response to e-mailed questions.
Stocks Not Cheap
Mobius doesn’t see Brazilian shares trading at bargain levels, although he did cite some well-managed companies that look attractive after the Ibovespa benchmark index fell 20 percent from a 12-month high in February.
“Our favorites are companies with good corporate governance who have resisted the temptation to engage in corrupt practices and who respect shareholder rights,” he said, without citing specific names. The most attractive groups include consumer products companies. “There are also some manufacturing firms who have a strong international positions and are able to earn substantial foreign exchange.”
Earlier this month, the Brazilian real weakened to an almost two-year low. That decline, combined with increased productivity, could make the exporters more attractive and “be a blessing in disguise,” he said.
Brazil’s central bank has been flooding the market with foreign-exchange swaps aiming to reduce traders’ will to hold speculative long dollar positions and reduce the volatility of the currency. The outstanding amount of FX swaps jumped $28.5 billion since it started intervening more aggressively on June 8.
Mobius says the bank shouldn’t try to control the exchange rate, as such expenditures are a waste of foreign exchange and prompt further outflow.
“The central bank in Brazil should only work towards a liquid foreign exchange market so that the currency can find its market level,” Mobius said.
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