Eletrobras, Cesp Tumble on Brazil Election Outlook

Centrais Eletricas Brasileiras SA and Cia. Energetica de Sao Paulo, utilities controlled by the Brazilian government, both fell more than 4 percent in Sao Paulo on speculation a ruling-party victory in the presidential election will limit the earnings potential of state companies.

Marina Silva, the third-place finisher in an initial round of voting, said yesterday she won’t endorse either of the top two vote-getters before an Oct. 31 runoff. That benefits Dilma Rousseff, President Luiz Inacio Lula da Silva’s choice, as Silva was expected to back opposition candidate Jose Serra, according to David Fleischer, a political analyst at the University of Brasilia.

Investors speculate former Sao Paulo Governor Serra would interfere less in state companies, while Rousseff’s government may reward political loyalty over managerial merit, according to SLW Corretora and Maxima Asset Management.

“Serra is recognized as a better administrator,” said Felipe Casotti, who helps manage the equivalent of $582 million at Maxima in Rio de Janeiro. “The market will continue reacting to election polls.”

Rousseff, Lula’s former cabinet chief, saw her lead narrow to 6 percentage points from 7 points a week earlier, according to a Datafolha poll published Oct. 15. While the gap is down from 14 points in the first-round vote on Oct. 3, investors expected the difference to narrow more, said Rosangela Ribeiro, an analyst at Sao Paulo-based SLW.

‘Corporate Governance’

“The market thinks Serra would bring improvements in corporate governance,” Ribeiro said. “The volatility should continue until the election.”

Centrais Eletricas or Eletrobras, Latin America’s largest utility, dropped 6.3 percent, the most since Feb. 4, to 24.40 reais at the close of trading in Sao Paulo at 4 p.m. New York time. Eletrobras surged 14 percent last week as polls showed Serra closing in on Rousseff. The power company known as Cesp tumbled 4.2 percent to 28.99 reais today, the biggest drop since May 20.

Rousseff won 47 percent of votes in the first-round election, compared to 33 percent for Serra and 19 percent for Silva.

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