Although a socially divisive figure, Jair Bolsonaro has convinced the market that he is Brazil’s best economic option. Hence the strong rally across Brazilian assets. The Brazilian real has returned close to 15% since its mid-September trough, bucking a generally sluggish trend across emerging market currencies.

Key to that strong market performance is Bolsonaro’s choice of finance minister. Paulo Guedes, a well-respected Chicago-educated economist, has ambitions to  put Brazil back on a fiscally sustainable path. In particular, his pension reform plans go beyond the bill currently sitting in the lower house, and would, if successful, be a game changer for Brazil’s long-term debt sustainability. The privatisation of a substantial number of Brazil’s state-owned enterprises would also receive a warm welcome from the market.

Of course, strong measures have proven difficult to pass in Brazil in the past. The market will focus intently on the new government’s ability to form a coalition for reform despite a notoriously fragmented congress. As such, Bolsonaro’s recent efforts to broaden his support base by inviting representatives of the Democrats party into his administration should be seen as a sign of pragmatism.

Are Brazil’s new moves toward reform already all in the price? We think not. Although local rates have rallied close to 200 basis points from mid-September, we continue to see value in the curve, given the lack of inflationary pressures and potential for significant fiscal turnaround. Rumours that well-respected central bank governor Ilan Goldfajn may not renew his term next year have been well digested by the market. Names floated as his replacement, such as former Central Bank of Brazil governor Arminio Fraga, would ensure policy continuity. The external environment may remain challenging for emerging markets as a whole but, given the scarcity of improving macro stories at the moment, Brazil could continue to stand out, provided that the new administration delivers enough to prolong its honeymoon with the market.