The decisive win by Brazilian presidential candidate Fernando Henrique Cardoso paves the way for sweeping reforms - including in the social security system - and long-term economic strength.
International investors also expect yet another stock market surge after the current correction.
Investors are cheered by the platform and apparent strength of Mr. Cardoso. Even in politically fractious Brazil, Mr. Cardoso's coalition seems likely to be able to pass constitutional reform measures that would address the underlying ills that have caused such problems as broiling inflation.
On the social security front, many expect reform to be a drawn-out process. While it remains unclear whether full privatization will occur, expected short-term changes likely will center on administrative and financial areas. Many believe the Cardoso government will need to address such issues as eligibility and ceilings on payments to keep the ailing system from going bankrupt. Eventually, observers expect partial or full privatization to become an issue. If privatization occurs, it could be a further boon to the stock market.
Anticipating wide reforms, many analysts and investors remain excited about the Brazilian stock market - even after this year's breathless gains. For the nine months through Sept. 30, the Brazilian market stood 93.4% higher in U.S. dollar terms, dwarfing the other 23 markets in the International Finance Corp.'s Investible Indexes' Price Series. Foreign institutional investors poured $5.082 billion into Brazil - 75% of which went to the stock market - between January and August. That compares with $5.477 billion in all of 1993 and $1.314 billion in 1992, according to Brazil's Securities and Exchange Commission.
Election-related profit-taking trimmed this year's gains to 77.2% through Oct. 7 in U.S. dollar terms, according to the IFC. "The Brazilian market could be up another 300% over the next three years as the best case scenario," said Alfredo M. Viegas, Latin America equity strategist with Salomon Brothers Inc. in New York. "At least, it should be up another 150% over the next three years. And if it achieves just that level, it would be the hottest major market in Latin America and one of the hottest on the planet."
Liza Perkins, an analyst with Baring Securities in Sao Paulo, expects the market to gain another 33% (compared with its level on Oct. 7) before the end of this year.
James Bogin, a portfolio manager with G.T. Capital Management in San Francisco, thinks if necessary economic reforms in Brazil are made, the market could double in the next 12 to 18 months.
Offering a similar prediction, Peter Grant, head of emerging markets equity investing for Putnam Investments in Boston, said the firm considers Brazil to be "one of the great growth opportunities in emerging markets." Putnam's two emerging markets funds are now 15% invested in Brazil, which is considered an overweight position.
To James Fairweather, a director of Martin Currie in Edinburgh, Scotland, "the market is trying to say that this is a turning point for Brazil." The country that boasts vast resources, people and a manufacturing base, has also been liberalizing trade and reducing tariffs. This year, it instituted a so-far successful anti-inflation program spearheaded by Mr. Cardoso, when he was finance minister.
"People are beginning to invest because the plan is working," said Mr. Fairweather, whose firm has been building its Brazil exposure especially over the last four months.
With the March advent of the Cardoso team's inflation plan, Brazil's price spiral withered to less than 2% per month by August; that compares with a 51% monthly level in June.
But constitutional reform will be needed to eliminate major causes of Brazil's once-notorious inflation. Among its causes, the federal government has to return to states and municipalities more than 50% of revenue, even though it still pays for such services as education and health as well as defense. To cover these costs, the government has pursued such inflationary acts as printing money or issuing more debt. Federal coffers are further strained by a bloated bureaucracy in which government workers cannot be fired and strategic state-owned companies can't be privatized without a constitutional change.
Tackling these and other issues, including tax reform, are on Mr. Cardoso's agenda. And his coalition apparently has the necessary support in the Senate and among governors - although it's apparently short of the two-thirds majority needed in the Chamber of Deputies, the lower house of the legislature.
Nonetheless, momentum is on Mr. Cardoso's side due to his popularity and his sizable victory, some analysts believe.
But for now, the market is holding back and possibly assessing.
With stock prices high, some want to lock in gains. In addition, recent appreciation of the new currency (which debuted July 1 as part of the new inflation-fighting program) could indirectly hurt the market. Many observers believe if the currency rises much further, the government, rather than jeopardizing trade, may impose a withholding tax on equities held for a short period.
Clearly, such a move would depress stock prices. But Salomon's Mr. Viegas believes this would present a buying opportunity to the longer-term investor.
Some investors, including Thomas Tull, a principal with Gulfstream Global Investors Ltd., Dallas, have underweighted Brazil, and are waiting in the aftermath of the speculative run-up. Now, he wants to see some positive "fundamental economic" outcome of a Cardoso victory.
Mr. Tull plans to travel to Brazil early next year. Then, he'll "take the economic and political temperature" in the country and assess investment opportunities in light of the new government.
Douglas Campbell, president of institutional broker D.A. Campbell Co. Inc., Los Angeles, believes the "opportunity to buy (Brazilian stocks) blindly no longer exists." The market "is starting to reach an adequate level, although it ... may still have another 40% to 50% left to go to reach that level."
But Salomon's Mr. Viegas sees a continued, strong long-term story. Some of his argument lies in the data. According to Mr. Viegas, the return-on-equity in Brazil "still has another 300% to gain before it reaches just two-thirds of that today in the markets of Chile and Argentina. Through September of this year, those (latter) two markets have been gaining on average 40% to 50% per year annually since 1986, compared with only 16% in Brazil - and that's only because of Brazil's rises over the last two years."
Salomon recommends investors consider "privatization candidates and core private sector holdings." While privatizations offer obvious economic attractions, some investors want to find companies that would benefit from greater consumer spending in the new economic, less inflationary environment.
Some of the "middle tier" companies that Salomon recommends: Brahma in beverages; Ceval and Sadia in food; Brasmotor in appliances; Coteminas in textiles; Lojas Americanas in retailing; and Iochpe-Maxion in auto parts.
Bill Hieronymus also contributed to this story.