Recovery of Brazilian shares will be difficult before elections

After a year to forget, strategists say Brazilian stocks have room to rebound, but don’t expect everything to be smooth sailing.

Latin America’s largest economy has been home to one of the worst performing equity markets in the world this year, and the benchmark Ibovespa index is heading for its first annual decline since 2015.

With valuations now at the lowest levels in more than a decade, analysts surveyed by Bloomberg forecast an average 20% gain for the market next year, even as rising interest rates, slow growth and a divisive choice fuel. The volatility.

“There is room for tactical advantages,” said Caesar Maasry, head of the emerging markets cross-asset strategy team at Goldman Sachs Group Inc. tangible reform ”.

Strategists from JPMorgan Chase & Co. to Bank of America Corp. forecast the Ibovespa to end 2022 at 127,000, down from Monday’s close of 105,554, according to the average estimate of 10 analysts surveyed by Bloomberg. None of them had predicted the decline this year.

‘Bumpy market’

Maasry is the least optimistic of the bunch, setting a historic precedent.

“The fiscal challenge remains significant, and we recall that the country’s last economic recovery from the 2016 recession was quite shallow and short-lived,” Maasry said. “More worrying is that the external environment in 2022 will not be particularly favorable.”

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

“We recognize a bumpy market with next year’s presidential elections, but we believe the current asymmetry” is too attractive to ignore, Santander strategist Ricardo Peretti wrote in a report.

The elections will be held in October, likely pitting President Jair Bolsonaro against former left-wing president Luiz Inácio Lula da Silva, who has led opinion polls for the presidential race. Their divergent views on economic policies are helping to fuel market uncertainty.

At the same time, economists expect steeper rate hikes, and the economy will likely expand less than 1% next year.

Foreign investors

A key support for the domestic stock market could be the continued inflows of foreign capital. Foreign investors poured 66.3 billion reais (US $ 11.8 billion) into the local market this year through December 22, excluding inflows from stock offerings.

“From a commercial point of view, the participation of foreign investors is essential for the end of the current bear market in Brazil,” according to Morgan Stanley strategists led by Guilherme Paiva, who says that the Ibovespa could reach 140,000 in the best of cases. In a worst-case scenario, including lower commodity prices, energy rationing and unorthodox macroeconomic policies after the presidential election, they say it could drop to around 88,000.