Ice Age: the Post Covid-19 New World

Six months into the Covid-19 crisis, many of us feel like Manny, Diego and Sid: hurtling through a world on the edge of life-changing cataclysms, not sure what tomorrow will look like.

Nowhere has this angst been clearer than in the stock market.  Cruise lines have tanked, which is understandable given the industry very high fixed costs, high debt leverage and its inability to operate (in the US, as per the No Sail Order).  Airlines are likewise in an existential crisis for similar reasons.  At the other end of the spectrum, Zoom Video Communications (ZM) has experienced a massive rise in both customer usage and stock price.  Generally speaking, companies involved in physical activities have suffered while those that are associated with at-home or virtual activities have flourished.

But the stock market is supposed to look ahead, to discount future cashflows; monoclonal antibody treatments are proving useful, vaccines are expected to start being distributed by next spring, and the second wave of infection has so far been much less lethal than the first.  Trillions in savings remain on the sidelines which, at some point, will either be spent on Main Street or invested on Wall Street.

Why is it that the stock market seems to believe that we are and will remain mired in the Ice Age, confined at home, watching streaming videos and leaving home only for quick dashes to the supermarket?  Or are the fears of a change in the White House and the Senate so great as to stamp any feeling of hope and optimism?

Are we entering a new era where, among other changes:

·        No one flies for vacations or business reasons?

·        No one shops for clothes, be they fashion or sports oriented?

·        Alternative energy sources quickly take the place of oil and natural gas?

 

I don’t think so.  The question then is (a) which company to invest in and (b) when?

There is no magic recipe.  Logically, in times of stress and uncertainty about the future, it pays to be selective.  We will not give up flying, but we may fly less (at least for a while); in this case, only the strongest might survive; why invest in the #5 airline stock which could return 150% if investing in the #1 could return 50% over the same horizon but with a lot less risk?

In the fashion sector, uncertainly is the nature of the business.  I would ask myself: ”what is a reasonable value for this brand and does the enterprise value of the company (market value + debt - cash) reflect it?” There is no set formula but a commonsense approach (looking at comparable products and companies, historical data, likely future earnings, etc.) should yield a range of values to work with.

Energy, being the single most important factor for economic growth, has strategic, political and social dimensions in addition with concerns about global warming.  While it is reasonable to assume that oil and gas will fade as energy sources just like coal did, such transition will likely take 20 to 30 years:  the demand for energy keeps increasing, solar and wind power are both expensive and not easily scalable, nuclear fission is unpopular in the US and Western Europe and nuclear fusion is still at the experimental stage.  Fossil fuels are widely used because they have several big economic advantages (such as energy density, ease of transport and storage, scalability, cost) which solar and wind lack, and will continue to lack.

In all of these sectors, given their depressed valuations, investors willing to take the plunge should stick to the top companies: those that have enduring market positions, the riskier the sector the more reason to stick to the #1 firm.  Targeted companies should also enjoy very strong financials to carry them through extended periods of volatility or low growth, and high quality management; it is worth emphasizing that high quality management usually translates into a strong company culture which facilitates good execution and overcoming hard times.

The other question is when to get in.  Picking a good entry price is the most important decision in an investment cycle.  It is easier to determine if a good company is selling at an attractive price than to try and guess when market bottoms may be reached.  Finally, in times of stress and volatility, picking realistic goals is key: a stock which may rise by at least 30% over the next 3-4 years while paying a 2.5% dividend would return around 40% over that period while a US treasury would return 4% at best.  Why be greedy? 

Stock investing in the time of the Coronavirus

                                                                                                                                  August 12, 2020

 

These last few months have been difficult for everyone, but for many, worrying about one’s portfolio hasn’t been the most serious concern.

Nevertheless, whether you look at your savings or retirement account, life goes on and decisions must be made, including doing nothing.

To the extent possible, avoiding having to sell stocks or mutual fund holdings when markets are tanking should be priority #1. This means having enough liquid savings to rely on as a cushion. This may require reducing one’s stock portfolio and therefore the potential for gains.  The difficulty here is that it is easy to lament, on a weekly or monthly basis, not participating in rising markets, forgetting that crashes are rare but can cause permanent losses.

Once this liquidity cushion is achieved, holding a widely diversified portfolio with very low annual expenses seems the best choice for anyone holding a full-time job job and with little time to follow companies and their performance.  Very low-cost mutual funds that mimic the S&P500 come to mind here.

The power of compounding and staying invested are key to good long term performance: $100 invested in a bond paying a 3% coupon will yield a terminal value of $181 in 20 years[1].  If $100 is invested in a stock whose price and dividend grow by 4% p.a., the end value jumps to $387.

When markets crash as they did in March, it is tempting to sell and bail out (if market induced stress was too high, you probably had invested too much in stocks and need to adjust); if you are an extraordinary trader, this may work.  But for most of us, long-term compounding beats trading.

When faced with financial crashes such as that caused by Covid-19 you should ask yourself the following before bailing out or investing more money:

Is this (i) a life changing event, or (ii) do I expect this crisis to be resolved within a few months or years, and the economy to recover within 5 years at the most?  If it is (i) you may well want to sell; if it is (ii) you may want to be less drastic.  So far, I haven’t lived through what I would call a life changing event;

·       Am I invested in great companies that can survive a crisis? If the answer is yes and I sell now, how will I know when to get back in?

·        Do I hold so-so stocks which looked like easy speculation when I bought them?  If the answer is yes, I should sell and take my losses.

·        If I am invested in an industry which is particularly hard hit, am I invested in the #1 company (i.e. best competitive position, strongest client relationship, strong financials and management) or in the #3, 4 or 5?  And if I sell #3, 4 or 5, do I buy #1 or not?

·        Are there high-quality companies offered at fire sale prices which may recover within 3 years?  If the answer is yes and I have $100 to invest, why not put $30 to work and start buying them?  It is a lot easier to gauge whether a great company is priced cheaply than to guess whether markets have hit bottom.

This Covind-19 has been very taxing; it has caused markets to plunge some 30% very quickly, and just as quickly these have rebounded to their historical highs (S&P500) or very close to (Nasdaq, Dow Jones).  They may still behave erratically.

Clearly, by mid-March, a buying opportunity arose to buy great companies (as defined above) when they were selling at attractive valuations.  If one believed that the economy would return close to normal within the next 3 years and so would earnings, then the likes of General Motors (p/e multiple of <4[2]), Microsoft (p/e of 18[3]), Facebook (p/e of 18[4]), even Exxon (p/e of 8-9[5]) seemed quite attractive and worth putting some money into.  Such money to come from cash in investment accounts, not the liquidity cushion.

Even then, since predicting market bottoms is impossible, had you bought stocks around mid-March, you could still have taken a 8%-10% paper loss within a week; if you had bought Southwest, that loss would have reached 25% by mid-May after Warren Buffett announced he had sold all of his airline stocks.  You then would have asked yourself:  Do I sell? Do I stay put?  Do I buy more?

People like to quote the famous Rothschild quip: “Buy when there is blood in the streets”.  They forget the last two words:”..including yours.”  That makes it a lot tougher.

What now?  GM, Microsoft and Exxon now sell at approximate p/e multiples of 5.5, 27 and 11 respectively; higher, but not crazy high.  Other stocks, particularly in the high-tech and biotech sectors have soared:  Facebook’s p/e multiple went from 18 to 34; Apple’s went from 18[6] to 36, Tesla went from 60 to 222[7], and Zoom Video from to 640 to 1,400[8].

The difficulty in making buy/hold/sell decisions in this environment is that, as in most situations, several forces weigh on stock prices and their prospects are either unclear or unknowable.  As Yogi Berra, or was it Niels Bohr, once said, “it is tough to make predictions, especially about the future”.

Perhaps the biggest factor is real (after inflation) long term interest rates; what return can you earn taking little risk, if any?  For the decade before the 2008 Great Recession, real yields on 10 Year Treasuries averaged around 2% p.a.

After the Recession, as the US and the world recovered, most market actors expected interest rates and inflation[9] to normalize (i.e. rise).  That didn’t happen. From 2009 to 2019, inflation averaged 1.6% p.a. and 10 Year Treasurys averaged 2.7% p.a. for a real 1.1% p.a. average real return.  Today the nominal yield is 0.67% p.a. and with inflation falling to 1% p.a. in July, the net return has turned negative.

Park your money in US Treasurys and, at current rates, it will shrink in real terms.  With the Federal Reserve pumping more money into the economy and with unemployment not expected to return to 3.5% any time soon, risk-free investments are likely to remain value traps for some years to come (yet they should be part of an investment strategy seeking to maintain a liquidity cushion).

The $64,000 question is:  what is an acceptable p/e multiple for stocks when Treasury real returns are zero or negative?  A lot is the answer, as long as that lasts.

Today, the p/e multiple of the S&P500 is 29, which results in an earnings yield of 3.45% p.a. (1/29).  For the Nasdaq, the multiple is 23.5 and its earning yield is 4.25% p.a.  Subtracting the nominal return on Treasurys gives us an equity premium of 2.8% and 3.6% for S&P500 and Nasdaq respectively[10].  This looks low.  But wait, analysts often refer to 15-17 as a “normal” p/e multiple range for the S&P500; if 3% is also a  "normal" nominal yield for 10 Year Treasurys, then we derive more “normal” equity premia of…2.9 to 3.7%?  Today’s equity premia no longer look crazy.

Will yields and inflation remain that low for long?  So far, forecasters have been wrong.  Eventually, there will be a price to pay for the huge issuance of government debt, but this doesn’t seem likely before 2022 or so.

Another factor impacting stock valuations is corporate growth prospects.  For most companies, particularly the mature ones, earnings growth will track economic growth over a multiyear period.  Covid-19 has wrecked employment and I have doubts that all the people who were furloughed or dismissed will easily find new jobs, and if they do, at the same pay level.  This means that we may have mid to high single-digit unemployment for several years, maybe 3 or more.  The other side of the coin is that productivity may experience a lasting boost as corporations make do with fewer employees and offices.  At the macro level, net-net, the impact of this crisis could be negative: higher unemployment resulting in lower demand resulting in lower corporate profits despite higher productivity levels; the p/e multiples may remain where there are, but if earnings do not recover and grow, stock prices should fall. 

In the auto industry, demand is relatively easy to forecast, players are well established and competition is fierce but predictable.  Earnings are likely to be fairly stable and p/e multiples rarely get into double digit territory.  But what about game changers?  Companies that will change the way we live?  Companies that develop a new demand and quickly dominate new markets?  Apple has been such pioneer with the iPod, the iPhone and the iPad.  Facebook is another, as is Google.  With huge gains of scale and brand recognition, their pricing power is immense and so are their profits.  Is Netflix one of them? Is Tesla?

New markets also create opportunities for new entrants, which complicates the job of investors.  Netflix and Tesla have had a strong head start, but they now face competition from powerful but less nimble behemoths:  Comcast and Disney for the former, GM and Volkswagen for the latter.  These trailblazers may eventually preserve their leadership thanks to their outstanding management, innovative culture and strong product lineup, but many aspiring unicorns will crash and burn.  Toyota, the preeminent global auto manufacturer has a market value of $220 billion vs. $294 billion for Tesla.  If all goes perfectly and real interest rates remain very low or negative, Tesla’s valuation may prove correct, but in a world of uncertainties it looks high for now. So does the valuation of Zoom Video.

To conclude here, picking companies that will change the way we live is a good strategy and has been proven correct by this health crisis which has crystallized lifestyle changes which heretofore were not evident.  The question is how to separate the winners from the ephemeral market darlings?  If one could do so consistently, the price paid for the winners would not be a concern. But since  nobody strikes .1000, a better strategy is to buy into a basket of innovators or wait for a market crisis to buy an established life-changer at a depressed price.

By curtailing mobility and social contacts, and by raising fears of the future, Covid-19 (and the massive government assistance programs) has boosted the propensity to save; people have postponed air travel and vacations, have reduced entertainment expenses, and generally have saved much more than in the past.  These savings have been parked as bank deposits but they have also been invested thereby putting a floor under the market once the March panic subsided.

Finally, human psychology has and will continue to play a role in how financial markets fare.  Humans, and their programmed machines, tend to react emotionally, whether selling en masse, trying to ride momentum waves, resisting taking losses or feeling itchy to put investable cash to use.  None of us is immune to that.

I would summarize the current market conditions as follows:

 What to do now?  My view is that market valuations are on the high side, supported by very high liquidity, very low interest rates and inflation, and the hope for a return to normal thanks to new and effective Covid-19 vaccines and treatments.

I don’t see the two green arrows disappearing soon.  I think that we are optimistic on the economy and vaccines: I believe unemployment may stay in the 8%-5% longer than we hope; I believe that we will get vaccines, but it will take months to distribute them, many people may refuse to take them and they may not protect us fully.

It seems to me that now is a good time to sell stocks of mediocre companies which have been carried by the rising tide, or stocks of speculative “high tech” or “biotech” companies which have done well but whose prospects are unclear.  I am more hesitant to sell the likes of Apple, Microsoft and other leaders which have AAA balance sheets; sure, they may be ahead of themselves, but their business prospects look good, and if I sell now, when do I get back in?

I would not try to jump onto the momentum bandwagon of hot stocks.  Most of the money is made at the time of purchase and buying high almost guarantees a loss.  There are still a number of laggard stocks in the banking, transportation and manufacturing sectors but they are not that cheap; these companies are also capital intensive and have comparatively high fixed costs which make them more vulnerable.

Should one be reluctant to sell the crown jewels yet want some downside protection or the opportunity to make some money in case of a future correction, buying put options on the S&P500 when this index sets new highs can be considered.  For me, it has always been secondary to keeping a liquidity cushion and to stock selection. 

Finally, I would sit on whatever available investable cash.  If I didn’t deploy all of it during the March lows, too bad, but I didn’t lose money that way.  There will be other opportunities.

In the end, how we manage our financial affairs is a personal decision.

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[1]  Pre-tax, assuming a sole annual dividend or coupon payment and that the coupon/dividend is reinvested.

[2]  Adjusting for net cash of $5billion (the 12/31/19 number) and using EPS of $4.5 for FY2022.

[3] Adjusting for net cash of $73 billion and using EPS of $7 for FY2022.

[4]Adjusting for $55 billion of net cash and using a no growth EPS of $7.

[5] Assuming an EPS of $4 for FY2022.

[6]  Adjusting for $75 billion of net cash and using no growth EPS of $12.

[7]   Using a conservative flat EPS of $7.

[8]  Estimates.

[9]  Consumer Price Index.

[10]  Using real earning yields and real bond yields would give the same results.

Of brain waves and electric dreams

The human brain is a wonderful construct, ceaselessly recording inputs, sorting them, storing them, creating links for faster and more meaningful future use, and at times making jumps which can be baffling, one moment weighing the merits of an investment in GE and the next remembering a slightly salacious Colombian joke.

Which joke?  That of the philandering husband caught in flagrante with his mistress in a motel room by his wife.  Sobbing, screaming, in pain, his wife keeps asking:” How could you do this to me!”  The hard-pressed husband, denying any infidelity but running out of arguments, finally demands:” Are you going to believe your eyes, or are you going to believe what I am telling you?”

So where is the connection between his situation and GE’s?

When the GE stock price fell into the $7-$9 price range, the whole company became worth no more than its aviation unit[1], a natural benchmark being Safran SA from France, its joint-venture partner in the commercial jet business.  Safran SA has a market value of $56 billion with revenues which are ¾ those of GE Aviation.

GE’s Healthcare unit remains very healthy and profitable; in a 12/3/18 article, Barron’s valued it at $60 billion.

GE has retained a 50.1% stake in Baker Hughes which is worth over $12 billion at today’s stock price.

It is about to sell its Transportation unit for over $3 billion.  Its Renewable Energy unit is probably worth that much or more.

So far, these units add up to a lot more than $74 billion.  Factoring in GE’s Industrial net debts (i.e. using enterprise values rather than market capitalizations as benchmarks) lowers valuations, but not conclusively.

The big negatives though are the Power division and GE Capital.  Here, the quarterly conference call of today was helpful in shedding light.

GE’s CEO stated that while he wouldn’t absolutely guarantee that all skeletons had been removed from the GE Capital’s closets, he felt that there shouldn’t be any new material liabilities beyond those which had already been identified.

 

As for Power, while its 4Q18 revenue were down, its results in the red and the global market was still shrinking, GE’s CEO felt that it could reduce production capacity to better match expected demand and improve management to shore up results.

While GE is not out of the woods, it no longer appears in dire needs of funds, there shouldn’t be more large skeletons in the closets, its top management ranks have been upgraded and it is moving decisively to get into shape.  That is not to say there are not major liabilities, rather, that, by now, there are fairly well quantified.

The unfortunate wife of the joke was asked to believe her husband’s denials.   GE shareholders, so far, have been asked to believe short term pessimists.  Instead, they all should believe their eyes.

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[1] $60 to $80 billion vs. $56 (Safran mkt value)/0.75 or $74 billion.

Latest back of the envelop look at GE?

Yesterday evening, after having witnessed the GE stock price tank for a week, I decided to take another look at the company and try to come up with a rational “back-of-the-envelop” valuation.  My basic premises were that (1) the company had valuable businesses, (2) the world appetite for electric energy would keep growing, and (3) for the foreseeable future, renewables couldn’t displace fossil fuels, in particular natural gas.

My conclusion was that, under this set of assumptions, GE seemed undervalued by a wide margin.  The announcement today that a new CEO with successful experience at running an industrial conglomerate had been appointed only reinforced my views.

The valuation methodology was as follows:

·        Using market value for Baker Hughes  A GE Company since its stock is publicly traded,

·        Looking at competitors for the Aviation, Healthcare and Renewable Energy divisions,

·        Taking a mixed approach for the Power division,

·        Valuing GE Capital at zero.

Baker Hughes

I applied a modest 15% control premium since GE owns 61% of the company.  This yields a $26 billion value for GE’s stake.

Aviation

The comparable here was Safran, the French company which is also a 50/50 partner with GE in the commercial jet engine business.  The benchmark used was Enterprise Value (that is market capitalization + debts – cash) to Revenues.  For each division, I had to come up with an estimate of each division’s debt.  I am sure that my allocation of GE’s debts of $34 billion, ex-GE Capital, among each division was wrong, but overall, it probably doesn’t substantially change my conclusions.  Aviation was thus valued at $74 billion.

Healthcare

This was the most critical valuation, as it assumes that GE will successfully develop its imaging, life science and IT activities.  If it does and commands the same kind of valuation as companies such as Baxter International, Medtronic or Stryker, then I put its potential value at $82 billion.

Renewable Energy

Real difficulties start here as international competitors such as Vestas, Siemens Gamesa and Nordex carry widely different valuations.  In the end, I chose Siemens Gamasa as the more comparable given its size and low profitability.  This gave me a $4 billion valuation.

Power

The most difficult division to value given its gloomy medium-term prospects and the excessive price that GE paid for the power assets of Alstom.  Still, the assets of that division were listed at $71 billion.  Today GE announced that it was writing off $23 billion of goodwill, a good deal related to the Alstom acquisition.

Possible valuations using estimated book value, multiples of revenues and p/e multiples based on future estimated normalized profits range from $49 billion to as low as $8 billion.  In the end, I thought $15 billion was a reasonable number.

This sum of the parts exercise gets us to $201 billion, or $23/share.  Again, this is not a measure of GE’s performance today, or of its best long-term potential; it is a rough estimate that incorporates a moderate turnaround at Power and a market valuation for a stand-alone Healthcare.

Indeed, if I am correct, there may never be a spinoff of Healthcare; for that reason, and unless the new management can convince investors that they will be very successful at allocating capital and running a multifaceted company, the market may impose a conglomerate discount of 10% to 15% on GE.

I also didn’t make any adjustment for yet unfunded pension liabilities, but I didn’t take into account any cash holding either.  Could this and other as yet unidentified pitfalls subtract from our estimate?  Yes.  Would a $20 billion provision cover such “unknown”, I would think so.

In summary, GE’s reasonably optimistic medium-term valuation should range between $201 billion ($23/share) and [$201 bn - $20 bn]x85%, i.e. $153 billion ($17.6/share).  The current share price of $12 seems low to me.

The Country of the Future?

In 1960 the Gross Domestic Product per capita of South Korea was US$158.  By 2016 it had grown to US$27,539.  Over the same period, the numbers for Brazil were US$210 and US$8,650[1]. 

Adjusting for purchasing power parity doesn’t change the picture much. Over the 1990-2017 period, and in constant US dollars of 2011, the results were US$11,633-US$35,938 for South Korea and US$10,345-US$14,103[2] for Brazil.

Discounting the drag caused by its much larger population and looking at overall country GDP data, Brazil still underperformed: over the 1960-2016 period, its GDP grew from US$15.2 billion to US$2.05 trillion (+13,453%) while South Korea’s grew from US$4 billion to US$ 1.53 trillion (+38,576%).

Fast forward to 2018.  Brazil is in the last stages of the biggest corruption scandal of its history, the so-called Lava Jato/Car Wash, which sent a former president and many political leaders from the left, right and center to jail; for the first time in years, active and retired military leaders are raising their voices to warn against further institutional and judicial drift; crime and personal security are foremost among the population’s concerns; and a key presidential election is less than two months away.

What next?  Is the wheel about to turn, and if so, which way?

Two polls reveal the true dimension of the next president’s challenge:

§  92 % of Brazilians believe that the judicial system treats the rich better than the poor, and
§  As recently as August 22, former president Lula, who remains in jail for corruption, led voting preferences with 39%[3].

In September, two events shook the already atypical presidential campaign: 1) former president Lula was ruled ineligible and his party, the PT, named Fernando Haddad as his replacement, and 2) Jair Bolsonaro, the rightwing candidate who was running second to Lula, was the victim of an attempt on his life and will remain hospitalized for several weeks.

Most candidates have a familiarity deficit with the population.  As of September 9, the following table shows that less than 1/3 of the population knew the main candidates “very well” and about half knew them “very well” or “a little”:
 

	Geraldo Alckmin	Jair Bolsonaro	Ciro Gomes	Fernando Haddad	Henrique Meirelles	Marina Silva
Knows very well	30%	29%	25%	17%	13%	27%
Knows a little	29%	23%	29%	21%	19%	32%
TOTAL	59%	52%	54%	38%	32%	59%

Source: Datafolha.

The PT and Fernando Haddad face a challenge: how to make the candidate from Sao Paulo nationally known without having him appear as a mere stand-in for Lula.

The other candidates face another kind of challenge: better known because they have been in politics longer and/or have already ran for the presidency, they also represent the “political establishment” which many voters distrust.

A relatively new comer on the national stage, Bolsonaro is now enjoying a rise in sympathy for having been stabbed, but over the next few weeks his ratings will likely suffer from diminished exposure and his inability to campaign in person.

The absence of a clear leader in the polls also reflects voters’ indecision:  55% of respondents declared themselves set in their choices vs. 80% in 2010 and 2006 and 70% in 2002 and 2014[4]. 

Political cleavages and history make it difficult to imagine the right or the left easily uniting behind one candidate in the second round.  Bolsonaro and his small party, the PSL, haven’t much in common with Alckmin and his traditional center coalition; the PT has historically refused to join any coalition that it didn’t lead, and Ciro Gomes so far has not been welcome. This also leaves Marina Silva, the best presidential candidate from the left in my view, out in the cold.

Can we make the outlook hazier for investors? Sure we can!

There is evidence that voters are ambivalent regarding needed economic reforms.  While Alckmin appears set to privatize many the state-owned enterprises, unions have often gone to court to block past privatizations, congress has been loath to let go of its patronage, and the public appears reluctant to see Petrobras privatized, even after the massive scandal that nearly bankrupted the company.

Apart from the PT, party discipline is weak in Brazil, making governing difficult and reforming very difficult.  This is unlikely to change this time around.  Even if Haddad wins, there will inevitably be tensions between him and Lula and their respective followers as the new leader seeks to establish himself[5].

More importantly, the diverging economic paths followed by Brazil and South Korea over the last 50 years reflect profound differences in history and culture.  These two factors are powerful and resilient, and not limited to these two countries.  For a while, leaders can overcome them, as FH Cardoso did in Brazil or Kemal Ataturk did in Turkey, but the forces to undo or blunt deep reforms are strong, ever present, and in the end often overwhelming.

The operating horizon for traders and even most investors in emerging countries is short; in Brazil, not everything is negative.

For example, the Lava Jato scandal is fresh in every memory and one can expect governments and politicians to be more careful with public assets for the foreseeable future.

Most candidates must realize that they lack broad popular support and that further dividing the population once in office would be a national disaster and politically risky.  With Lula absent from the ballots and Bolsonero in the hospital, it is close to 60% of the voters’ first choices which are gone or in jeopardy.

The presidential elections will be decided by October 28 at the latest.  While the race is wide open, it wouldn’t surprise me if Fernando Haddad, with the well-organized support of the PT and of Lula himself, were to reach the second round and face Jair Bolsonaro.  If he failed, it could be because Ciro Gomes rallied more of traditional voters from the Left.

In a second round, the outcome of a Bolsonaro/Haddad or Bolsonaro/Gomes race is a toss-up at this stage.

These are two among several scenarios, though unless the campaign dynamics change appreciably, they are the most likely for me. 

Brazilian stocks are not off-limit in the absolute, but either current prices fall further to reflect the inherent risks of this election or any buying decision should be delayed until after the second round is over, in my view.

The future always appears unclear, but the past is not and is as good a guide of things to come as any.  Days of Future Passed as the Moody Blues would say.     

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[1]  Source: World Bank, Trading Economics.

[2]  Source: World bank

[3]  Source: Datafolha.

[4]  Source: Datafolha.

[5]  A good example of unhelpful tensions between a former president and his anointed successor was on display in Colombia between Alvaro Uribe and Juan Manuel Santos.