Market watchers expect a smooth transition into a new Lula da Silva government in Brazil, with early forecasts betting the tight run contest will create a moderate leadership.

The 77 year old left wing Lula won the presidential election with 50.9% of the vote against right wing incumbent Jair Bolsano, who, however, performed better than expected.

Bolsano has yet to concede, but some of his key allies have done so, dampening fears he will contest the result. 

Eurozone inflation jumps to record high as economic growth slows

US president Biden moved fast to congratulate Lula to legitimise the result, and demonstrations by Bolsonaro's staunch loyalist supporters, such as truck drivers blocking roads in some states, failed to gain broader traction. 

Omotunde Lawal, head of emerging market corporate debt at Barings, said: "Assuming an orderly transition of power takes place, we expect to see some reversal of the political risk premium that we have observed in the run up to the elections.

"The market expectation is that Lula will be pragmatic and take a more centrist approach given the slim margin of victory. The hope is that he can repeat the success of his first time in the office when he again had the commodities tailwind." 

Elevated commodity prices provide a boost for Brazil and many Brazilian companies are exporters.

IMF cuts Asian growth forecasts

All eyes are on who Lula will appoint as finance minister for indications of his economic policy. Edward Glossop, emerging market economist at abrdn said it's not in Lula's interest to rock the boat early on.

"Any hard-left appointments or personnel sympathetic to things such as fiscal profligacy and capital controls would be likely to trigger a sharp tightening of local financial conditions," he said.

Lula has been elected on a mandate to expand Brazil's social welfare, raise taxes and reverse privatisations.

But Glossop added solid support for centre-right parties in Congress may mean some of his policies will need to be diluted. 

"And with central bank governor term limits no longer synced with the presidency, the BCB should be an anchor for financial markets," he said.

Charles Gélinet, manager of the J. Stern & Co. Emerging Market Debt Stars fund said the immediate election impact on the Brazilian macro is likely to be limited.

With recent Brazilian GDP growth above trend in Latin America and more broadly, "one would question whether drastic measures would even be needed", he added.

For Brazilian corporates, Gélinet expected little direct disruption. 

Fears of a more interventionist approach from Lula and his PT Party, particularly in regard to state-owned enterprises, are allayed by recent changes in law.

Legislation such as the ‘SOE Governance Law' (2016), which aims to align practices with the private sector and disengage from party politics, and bring more investment into key sectors of the Brazilian economy. 

This should help avoid direct intervention in banks such as Banco Do Brasil, Gélinet said, the oldest bank in the country, and majority owned by the government.

Gélinet added: "We like Banco Do Brasil's steady record in generating recurring revenues given its good quality diversified loan portfolio, stable loan-cost funding, and strong capitalization; it means the bank is conservatively positioned to absorb an uptick in non-performing loans if the economy slows."

More than half of investors prefer engagement over divestment on ESG

Fuel pricing policy will be another key topic. There could be further pressure on Lula to keep prices artificially low in a drive to combat inflation, Gélinet said.

For now the state-controlled oil and gas company has reaffirmed its policy to maintain prices in line with international markets. 

Gélinet added: "Even so, we prefer to avoid direct interference risk in the energy sector and prefer companies such as Cosan, which is a diversified conglomerate with key operations in the biofuel supply chain as well as natural gas distribution, lubricants production and commodity logistics."