* Itaú Asset sees Brazil consumer shares pricier
* Shares in regulated sectors to remain "cheap"
* State meddling may be distorting share prices
By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO, Nov 26 The fate of Brazil's equity market will increasingly hinge on government policies next year, with consumer stocks rising due to incentives for consumption and shares in the energy and financial sectors feeling the pinch of recent regulatory moves, executives at Itaú Asset Management said on Monday.
Shares in industrial and services companies will get much pricier, reflecting the impact of interest-rate and tax reductions that will help revive Brazil's flagging economy, said Gustavo Murgel, who as chief executive officer oversees more than 300 billion reais ($144 billion) in assets for Itaú.
Currently, Brazilian shares in that segment trade at a premium to other emerging market and global peers, and are priced above their historical average, said Paulo Corchaki, chief investment officer at Itaú Asset Management, at an event. Next year that trend is likely to continue as the government is seen maintaining its activist stance on economic policy.
In contrast, sectors where the role of government is seen as less benign will likely underperform, Corchaki added. For financial, electricity and telecommunications stocks, expected earnings in Brazil are seen trailing those of emerging markets and global rivals, both executives noted.
"What's expensive now will get even more expensive, and what's cheap now will remain cheap," Corchaki said at an event with financial journalists in São Paulo.
Their comments underscore the challenges President Dilma Rousseff's policy approach are imposing on money managers and concerns that the country, which over the past decade lured hundreds of billions of dollars from investors as growth gained traction, is now losing luster because of growing state meddling in the economy.
"I wouldn't say the policy approach is heavy-handed, but our clients want to understand how far this could go" Murgel said.
The recent implementation of tax and credit relief favored some sectors at the expense of others, while government pressure on banks to cut the cost of credit and on power utilities to accept the renewal of licenses in exchange for a decline in rates has made share prices bounce in recent months.
Despite the threat of rising intervention, corporate earnings among Brazil's listed companies should grow an average 18 percent in 2013, compared with the 10 percent contraction that Itaú Asset is predicting for this year, Corchaki said.
The same policies that have made it more difficult for some investors to foresee a direction in the price of some Brazilian equities are also making it easier for money managers to predict the path of interest rates, inflation and the currency, Corchaki added.
Money managers at Brazil's No. 1 private-sector asset manager expect the inflation rate to rise as high as 5.5 percent, interest rates to remain near the current record lows and the currency to fluctuate between 2.10 reais and 2.15 reais per dollar.
A decline in interest rates to record lows is forcing funds to build a more diverse base of financial instruments to help lure new clients, Murgel noted. At some point, pension funds and other specialized investors will have to boost purchases of corporate debt, exchange-traded funds and shares in funds made up of asset-backed securities to beat the returns offered by the most traditional asset classes, he said.
Based on the earnings estimates for next year, Corchaki sees the benchmark Bovespa stock index ending next year at around 66,000 points. The index is almost unchanged this year and is currently trading at around 56,900.
The Bovespa sank 18 percent last year.
Mixed signals about the extent of the global economic recovery and the debt crisis in Europe may keep weighing on risk-taking, both executives said. Brazilian investors tend to look to data and market performance in the United States and other key financial hubs as a gauge for global market sentiment.