Brazil?s election result is a disappointment but not a catastrophe.? What happens next:

????????? First priority: political reform.??Holding a referendum on political reform was the first priority listed in Dilma?s victory speech.? This should be seen as a positive move but will be a challenging task given the breadth of the Brazilian political structure.

??????????A new finance minister.??Dilma will first need to appoint a new finance minister; an important nomination which will help shape the country?s economic policy for the next 4 years. According to the Financial Times, the rumoured candidates include senior minister Aloizio Mercadante, Nelson Barbosa, former finance secretary, and Luciano Coutinho, head of the BNDES development bank.

??????????The weak economy, volatile markets and a vulnerable unemployment rate will force government action.??The widening fiscal deficit over the last four years under Dilma has simply not been able to drive growth in the country, which is now at its lowest rate since the early 1990s.? Low growth will inevitably force companies to reduce their cost base and cut staff resulting in higher unemployment and a probable end to Brazil?s period of record-low unemployment.? Given Dilma?s successful track record in keeping people in jobs, which was also a key factor to her winning the election, an increase in lay-offs will force her government to address these issues with more urgency.

??????????The government will need to act upon its promise to deliver ?change?.??Whilst the focus has been on driving growth through a consumption-led model, the government must now shift some of their focus to driving growth through greater investment spending and savings.? This will also require more cooperation with the private sector, a reduction in government intervention in businesses and a much needed reform to the tax code, amongst other reforms. Given the state of current affairs which is also undermining Brazil?s investment grade credit rating, the government has no choice but to act now.? Dilma promised ?great changes? in her victory speech yesterday , saying ?sometimes in history, narrow results produce much stronger and faster changes than very wide victories?.

We expect a negative reaction in the markets to the election results which was not completed priced in with the currency expected to fall significantly.? However, the government?s next few moves will be crucial.? Above all else, Dilma needs to appoint a pragmatic economics team to support her and to help drive the much needed reforms forward.? In the meantime, the medium to long-term investment themes in Brazil remain intact supported by the country?s well-capitalised banking system, strong demographics, a rising middle class and high consumer confidence, amongst other factors.? We favour stocks that are less exposed to the volatile and indiscriminate passive investment funds (such as ETFs) and whose revenue streams will continue to benefit from Brazil?s domestic consumer story.