Foreign banks raise bets on Brazilian stocks
By São Paulo|
Strategists of foreign banks have raised their optimistic recommendations for the Brazilian stock market, despite the Ibovespa’s 31% gain this year.
Experts still see room for gains, particularly based on the perception that the economy has reached the bottom and that corporate profits should improve. The expectation of continued inflows of foreign capital also helps positive forecasts.
UBS, Citi, Bofa and J.P. Morgan have an overweight recommendation on Brazilian stocks. And Credit Suisse has just raised its recommendation to market weight from underweight.
In addition to the improvement in profit projections and global liquidity, higher commodity prices justify bets. UBS has decided to raise to overweight from neutral its recommendation on emerging markets stocks in its global portfolio — and Brazil is among the bank’s favorite countries.
Despite the Ibovespa’s gains in the year, Mr. Mariscal does not believe that the market is expensive. “It’s just appreciated,” he says. But as the recommendation to buy more Brazilian shares is based on expectations of earnings growth, the stock market still has room to be re-assessed for gains.
Mr. Mariscal expects the second half will show a visible improvement in Brazilian economic activity. In this context, he still believes that Brazil offers some of the most interesting investment opportunities among emerging countries. The decline of interest rates and inflation, in particular, should reduce the cost of capital.
This decrease has led Credit Suisse to raise its recommendation for Brazil. Andrew Campbell, Credit’s chief equity strategist for Latin America, raised his target price for the Ibovespa to 60,000 points in 2016 from 50,000 — the Brazilian stock market benchmark ended Monday at 56,756 points.
External and internal improvements have led credit default swaps, or CDS (sort of insurance against defaults), in Brazil to decline to 299 basis points from about 500 early in the year. The higher the level, the bigger the fear that the country will not pay its debt. A drop of another 100 basis points in the CDS in the country could lift the Ibovespa to 70,000 points, but this scenario is unlikely in the short term, Mr. Campbell says.
These levels would place Brazil alongside countries with investment grade again, but he points out that the country’s gross debt-to-GDP ratio is still high. In addition, the agenda of government reforms, although positive, still faces risks for approval and implementation, while political uncertainty can increase in the medium term, since there will be elections in 2018. There are also doubts about the Brazilian economy’s pace of recovery.
Bank of America Merrill Lynch (BofA) and J.P. Morgan have raised Brazilian stocks to overweight earlier, in March. At BofA, the equity strategist for Latin America, Felipe Hirai, says he remains positive on assets, despite the price. Mr. Hirai adds that there is still a possibility for inflows to Brazil, since funds that have arrived in the country so far were part of an allocation aimed at emerging markets in general, and not money dedicated to Brazil or local funds. He says that, until now, stock funds have not reduced their cash too much, and the multimarket funds, the Brazilian version of hedge funds, have not increased their positions on equity.
In a report, Citi reiterates it’s optimistic about Brazilian stocks. In addition to better estimates for profits, the bank says that the Olympics can help. According to Citi, in the last five Olympics, all countries that hosted the Games had a better performance in their stock markets than the global market in the following 12 months. The exception was the UK, which broke the pattern. For Citi, Brazil will draw more attention from investors during the Olympic Games.
For Mr. Hirai, the price-to-earnings ratio for 2017 (P/E, a measurement of risk) is 12 times, compared with a historical average of about 9 times.