“We see a balanced distribution of risks for Brazilian equities. Currently, Brazilian stocks price in a sanguine outlook, as evidenced by 1) year-to-date 46% outperformance vs EM and 2) rich valuations at 13.1x forward consensus earnings or +1.9 S.D. above the 18-year average. Looking ahead, 2017 equity returns should be capped by: a) the prospect of 6 US Fed hikes over the next 2 years, b) a stronger U.S. dollar (TWI +6% in 2017e) and c) a more challenging environment for Social Security reform implementation,” according to a Morgan Stanley note posted by Dimitra DeFotis of Barron’s.
Brazil’s central bank could be of assistance with more interest rate cuts, something that has happened twice in the latter stages of 2016.
Brazil’s central bank has not hiked interest rates since last year. Brazilian stocks have rallied this year and banks in Latin America’s largest economy appear inexpensive, those institutions are faced with declining consumer credit quality. Additionally, some Brazilian states have recently delayed payment to public workers, potentially crimping the ability of those workers to repay loans taken from Brazilian banks.
“Our 66,000-point base case target for the local Bovespa index by year-end 2017 implies a mere 11% upside in the Brazilian real, up 4% in U.S. dollars … our conversations with clients in recent weeks have revealed a segment of the market that believes our outlook for Brazilian equities is too conservative (apparently, most sell-side strategists have their Bovespa targets in the 72,000-75,000 range.),” according to the Morgan Stanley note seen in Barron’s.
For more information on the Brazilian markets, visit our Brazil category.