Brazil rally too dependent on inflows, Chinese data, BofA says
SAO PAULO, Sept 13
SAO PAULO, Sept 13 (Reuters) - The outlook for Brazilian equities remains challenging in the short run, as a 12 percent rally since July has become too dependent on foreign investment inflows and bullish U.S. and Chinese economic data, strategists at Bank of America Merrill Lynch said on Friday.
There is limited room for further gains after stocks rebounded from their lowest level in about four years since mid-July, a team led by chief Brazil equity strategist Felipe Hirai said in a client note. Likewise, there are no apparent catalysts that could trigger a sustained recovery in prices over time, he added.
Shares in Latin America's largest economy are grappling with still-high investor skepticism over prospects of flagging economic growth, accelerating inflation in coming months and a weaker currency, Hirai said, noting that in recent weeks rising investment inflows have bolstered gains in the benchmark Bovespa stock index. In addition, volatility associated to next year's presidential election could further hamper confidence.
"We sense investors remain skeptical about Brazil," Hirai and his team said. "Although the short term rally can be supported by investors' positioning, a change in fundamentals is necessary for a more structural change in our top-down view."
Bank of America Merrill Lynch has an "overweight" recommendation on Brazilian equities, more based on a so-called bottom-up approach by which investors cherry-pick stocks selectively than a view on the potential performance of benchmark indexes. "We continue to find better options to buy in Brazil than in any other Latin American country," the note said.
Within emerging markets, Brazil's equity market stands out as cheap relative to peers, Hirai and his team added. Adjusting for a sector breakdown, Brazilian share prices are 16.5 percent cheaper than the average emerging market benchmark. According to Hirai's team, such discount only loses to China's 27.5 percent.
"We agree with the view that growth will gradually deteriorate, but it seems the market has priced in the deterioration very quickly, but not the fact it might be gradual," the note added.
In any case, the strategists noted a "discrepancy" between the views of local and foreign investors, with the former being a net-seller of Brazilian equities with 1.6 billion reais ($705 million) in outflows in August. In contrast, foreign investors have turned into net buyers of local equities in the same period, with net inflows of 2.1 billion reais last month.
"We believe that after the sell-off in equities and the real, foreign investors might be less bearish with Brazil, while locals still believe in deteriorating fundamentals," Hirai and his team said in the note.
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