Brazilian stocks are a buy because growth in Latin America's largest economy is recovering from a yearlong slowdown and the effect of excessive risk aversion on its economy is easing, strategists at Santander Global Banking & Markets said on Tuesday.
With an industry slowdown on the verge of turning and credit markets recovering as interest rates fall to record lows, shares in financial, real estate, transportation, retail and capital goods companies, known as domestic cyclicals, should gain, said Marcelo Audi, Santander GB&M's equity strategist for Brazil.
The benchmark Bovespa stock index, which is now trading at about 59,200 points, could reach levels somewhere between 65,000 and 70,000 by year-end as foreign investors ease concerns over growth and return to the region's biggest equity market, Audi said.
"Risk perception among investors for a while leaned towards pessimism, for the wrong reasons," Audi said at a presentation at the bank's headquarters in São Paulo. "Now we say: it's time to buy Brazilian stocks."
Audi's call comes as Santander prepares to host more than 180 key clients at a summit in the Brazilian beach resort of Guarujá this week - in which the bank will advise them to add exposure to Brazil's equity markets after two disappointing years for the Bovespa.
The Bovespa, which is up about 4 percent this year, was almost flat in 2010 before tumbling 18 percent last year.
Audi and his team are telling investors to raise allocations in Brazilian domestic cyclicals by a double-digit pace for the first time since mid-2009. Companies in that group include clearinghouse Cetip, capital goods maker Randon Participações, clothing maker Hering and Grupo Pão de Açúcar, the nation's largest retailer.
Analysts disagree over the outlook for corporate earnings in the third and fourth quarters following a slate of disappointing results in the second quarter of the year. Many companies reported weak earnings because of slowing domestic demand and the effects of a declining currency on existing debt, though Audi said that stronger readings of economic data are likely to more than offset the final stage of the "downgrading phase" in earnings estimates.
Domestic cyclicals will gain more weight on the Bovespa index in the coming years, chiefly at the expense of commodity-oriented shares - which right now account for nearly half the index.
Audi dismissed the idea that Brazil is losing its appeal among foreign investors as it becomes more difficult and costlier to do business in the country. Investors will return to the local equity market lured by the nation's growth potential.
Foreign investors flush with cheap capital provided by the European Central Bank early this year helped drive the Bovespa to a nearly 14 percent gain in the first quarter. However, deepening worries over the euro zone debt crisis and concern over heavy government intervention in Brazil's economy caused those gains to reverse in the second quarter. Since June, foreign investors have cautiously returned to Brazilian stocks in search of inexpensive shares and high returns.
Santander's chief economist, Mauricio Molan, expects gross domestic product to expand above 1.5 percent in the third quarter on a sequential basis, later speeding to a 4.2 percent growth rate next year, though below 4 percent for the next decade.
While Molan sees inflation under control at 5.4 percent this year, he expects recent stimulus measures enacted by Brazil's government to contribute to a 6 percent inflation rate in 2013.
Santander GB&M is the investment-banking and securities unit of Banco Santander Brasil.
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