| SAO PAULO, Sept 13
SAO PAULO, Sept 13 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.