May 14, 2009 / 1:29 PM / in 10 years

BUY OR SELL-Can Brazil's stock market rally further?

* Bovespa index up 34 pct since early March

* Bears say Brazil’s stocks climbed too far, too fast

* Bulls say rally reflects Brazil’s economic rebound

By Guillermo Parra-Bernal

SAO PAULO, May 14 (Reuters) - Brazil's benchmark Bovespa stock index .BVSP has gained a sizzling 34 percent since touching this year's low on March 2, driven by a revival in risk appetite among foreign investors.

Some analysts say the Bovespa has rallied too far too fast in such a short time, and that a selloff may be on the horizon. But stock bulls say the higher share prices reflect an ongoing economic recovery and don’t expect the rally to ebb any time soon, barring a few sessions of profit-taking.

Foreign investors poured $2.2 billion into the Bovespa in March and April, according to data released by the exchange. On Wednesday, the Bovespa tumbled 3.27 percent to 48,679.19, in line with global markets.

Does the Bovespa index have room to resume its rally in the short term?


“We are at the beginning phase of the next bull market. So entering the market now may not be a question of value opportunities but where do you want to be positioned for the long term,” said Geoffrey Dennis, a Latin America equities strategist with Citigroup Inc in New York.

Brazil’s economy is emerging from recession as government steps to unclog credit and resilient domestic demand offset eroding confidence, he said. Dennis expects the Bovespa to reach 60,000 by the end of 2009 as lower interest rates and a recovery in corporate profits fan renewed interest in stocks.

“Those who run the show in the markets look at their graphs and see no reason why this rally should fizzle,” said Helena Biasotto, who helps manage about 5 billion reais in stocks and bonds for Banrisul in the Brazilian city of Porto Alegre. “The ‘buy’ mode is switched on.”

While Dennis favors buying banking, materials, consumer and energy stocks, Biasotto also recommends adding shares of small caps as profits “withstood satisfactorily the flurry of bad events that were brought about by the global crisis.”

“Brazil has made a major move off the bottom of the market,” said Dennis, who doesn’t rule out a slight downward correction in prices in the near term. Still, he said, “The outlook is extremely good for the rest of the year.”


“We would not chase this rally and, for those investors that participated in this up-leg, we are recommending taking some profits off the table,” said Vinicius Silva, emerging markets strategist with Morgan Stanley & Co in New York, adding that he is “optimistic longer term” about the Bovespa.

Although Silva says the Bovespa may still rise to 60,000 by year end, companies in the index are trading at 13 times earnings, valuation levels he deems as rich. “In the near term the absolute return outlook is unattractive.”

“The market has done so well until the start of May on anticipation of a firmer global recovery that the hefty gains we have seen created a valuation problem” for Brazil stocks, said Deutsche Bank equities strategist Guilherme Paiva.

Room for short-term gains in the Bovespa are limited by the fact that recent interest-rate cuts that left the Selic rate at a record-low 10.25 percent last month obeyed more to “cyclical than structural factors,” Paiva said.

Deutsche Bank sees the Bovespa falling to 45,000 by the end of Northern Hemisphere summer. That might be an entry level for Brazilian shares again, Paiva said. (Additional reporting by Elzio Barreto; Editing by Brian Moss)

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