Investors See Bumpy Path to Brazil Rebound as Election Nears

Latin America’s largest economy has been home to one of the world’s worst-performing equity markets this year, with the benchmark Ibovespa index heading to its first yearly drop since 2015

A visitor points to an electronic board displaying stock activity at the Brasil Bolsa Balcao (B3) stock exchange in Sao Paulo, Brazil, on Monday, Nov. 8, 2021.
By Vinícius Andrade
December 28, 2021 | 10:13 PM

Bloomberg — After a year to forget, strategists say Brazilian stocks have room to bounce back -- just don’t expect it to be smooth sailing.

Latin America’s largest economy has been home to one of the world’s worst-performing equity markets this year, with the benchmark Ibovespa index heading to its first yearly drop since 2015. With valuations now hovering at the lowest levels in more than a decade, analysts surveyed by Bloomberg forecast an average gain of 20% for the market next year, even as rising interest rates, sluggish growth and a divisive election fuel volatility.

Winning Streak Comes to Haltdfd

“There is room for tactical upside,” said Caesar Maasry, head of the emerging markets cross-asset strategy team at Goldman Sachs Group Inc. “Still, Brazil’s medium-term outlook is more challenging due to a lack of tangible reform.”

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


List of estimates:

FirmStrategist2022 Close
Ativa InvestimentosPedro Serra117,000
Bank of AmericaDavid Beker125,000
BB InvestimentosVictor Penna137,000
Bradesco BBIAndre Carvalho130,000
Goldman SachsCaesar Maasry116,000
JPMorganEmy Shayo133,000
Morgan StanleyGuilherme Paiva120,000
SafraLuis Azevedo144,000
Santander BrasilRicardo Peretti125,000
XPFernando Ferreira123,000

‘Bumpy Market’

Maasry is the least optimistic of the group, pointing to an historical precedent.

“The fiscal challenge is still significant, and we recall that the country’s last economic recovery from the 2016 recession was quite shallow and short-lived,” Maasry said. “More concerning is that the external environment in 2022 won’t be particularly supportive.”


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

Brazil's Ibovespa trades below its historical average amid this year's routdfd

“We acknowledge a bumpy market ahead with presidential elections in the coming year, but believe the current asymmetry” is too appealing to ignore, Santander strategist Ricardo Peretti wrote in a report.

The election is due in October, likely pitting President Jair Bolsonaro against against former leftist President Luiz Inacio Lula da Silva, who has been leading opinion polls for the race. Their diverging views on economic policies are helping fuel uncertainty in the market.

At the same time, economists are expecting more steep rate increases, with the economy probably expanding less than 1% next year.

“The risks/rewards are roughly balanced,” said Will Pruett, a Boston-based money manager who oversees about $8 billion at Fidelity Investments, including about $300 million in the Fidelity Latin America Fund. “I’m waiting for more data on the path of inflation and rates before significantly changing my positioning,” said Pruett, who’s currently neutral on Brazil.

Foreign Investors

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

“From a trading point of view, the participation of foreign investors is paramount for the end of the current bear market in Brazil,” according to Morgan Stanley strategists led by Guilherme Paiva, who says the Ibovespa could hit 140,000 in the best of cases. Under the worst -- including lower commodity prices, energy rationing and heterodox macro policies following the presidential election -- they say it could fall to near 88,000.


“We have a cautious outlook on Brazil for 2022,” said Ed Kuczma, who manages $1.2 billion in Latin American equities for BlackRock Inc. and is underweight Brazil. The presidential election “presents the possibility of policy adjustments that create additional uncertainty.”

Among Brazilian stocks, Kuczma has been favoring car-rental companies, telecom and health care. Market volatility ahead of the vote may create opportunities for investors “to build positions in quality companies at attractive valuations,” Kuczma said.

Health care is also among the preferences of Fidelity’s Pruett. He likes Brazilian pharmaceutical firm Hypera SA and is also positive on food retailers.

“We are back at inflation and rate levels that were once considered normal for Brazil,” Pruett said. “The question is whether the past couple of years of lower inflation and rates were outliers,” he said. “The jury is still out.”