Investors see the bumpy road to recovery in Brazil as the elections approach

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(Bloomberg) – After a year of forgetting, strategists say Brazilian stocks have room to rebound – just don’t expect it to go smoothly.

Latin America’s largest economy has one of the worst performing equity markets in the world this year, with the Ibovespa benchmark index posting its first annual decline since 2015. Valuations are now at their lowest levels in more than a decade, according to analysts. Bloomberg predicts an average 20% increase in the market over the next year, even if rising interest rates, sluggish growth and divisive elections fuel volatility.

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“There is room for tactical upside,” said Caesar Maasry, head of the emerging market cross-asset strategy team at Goldman Sachs Group Inc. “Still, Brazil’s medium-term prospects are more difficult due to the lack of concrete reforms.”

Strategists from JPMorgan Chase & Co. to Bank of America Corp. see Ibovespa 2022 at 127,000, compared to Monday’s closing price of 105,554, according to the average estimate of 10 analysts polled by Bloomberg. None of them had forecast this year’s decline.

List of estimates:

“Choppy Market”

Maasry is the group’s least optimistic and points to historical precedent.

“The fiscal challenge is still big, and we remember that the country’s last economic recovery from the 2016 recession was quite shallow and short-lived,” Maasry said. “More worryingly, the external environment in 2022 will not be particularly supportive.”

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Still, many others point to stock valuations. The Ibovespa is trading at 7.8 times expected earnings, well below the 10-year average of 11.7 times. It hit 7.4 times earlier this month, its lowest level since 2009.

“We recognize a bumpy market ahead of next year’s presidential election but believe the current asymmetry is too appealing to ignore,” Santander strategist Ricardo Peretti wrote in a report.

The election is due to take place in October, with President Jair Bolsonaro likely to face former left-wing President Luiz Inacio Lula da Silva, who leads opinion polls for the race. Their divergent views on economic policy add to the uncertainty in the market.

At the same time, economists expect higher interest rate hikes, with the economy expected to grow by less than 1% over the next year.

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“The risks / rewards are roughly balanced,” said Will Pruett, a Boston-based asset manager with approximately $ 8 billion under management at Fidelity Investments, including approximately $ 300 million in the Fidelity Latin America Fund. “I’m waiting for more data on inflation and interest rate developments before I significantly change my positioning,” said Pruett, who is currently neutral on Brazil.

Foreign investors

Sustained foreign inflows could be an important pillar of the domestic stock market. Overseas investors have invested 66.3 billion reais ($ 11.8 billion) in the local market through December 22 this year, excluding inflows from equity issues.

“From a trading point of view, the involvement of foreign investors is of the utmost importance for ending the current bear market in Brazil,” said Morgan Stanley strategists led by Guilherme Paiva, who say the Ibovespa could reach 140,000 at best. In the worst cases – including lower commodity prices, energy rationing, and post-presidential heterodox macro politics – they could drop to nearly 88,000.

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“We have a cautious outlook for Brazil in 2022,” said Ed Kuczma, who manages $ 1.2 billion in Latin American stocks for BlackRock Inc. and is underweight Brazil. The presidential election “offers the possibility of political adjustments that create additional uncertainty”.

Among Brazilian stocks, Kuczma prefers car rentals, telecommunications and healthcare. The market volatility prior to the vote could provide opportunities for investors to “build positions in quality companies at attractive valuations,” said Kuczma.

Healthcare is also one of Fidelity’s Pruett’s preferences. He likes the Brazilian pharmaceutical company Hypera SA and is also positive about the food retail sector.

“We’re back to inflation and interest rates that were once considered normal for Brazil,” said Pruett. “The question is whether the past few years of lower inflation and lower interest rates have been outliers,” he said. “The jury is still pending.”

© 2021 Bloomberg LP

Bloomberg.com

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