Brazil, Mexico stocks to climb further

Brazil and Mexico's roaring stock markets, already up double digits this year, are forecast to rally to new record highs by the end of 2018 on solid performances in both economies, according to the latest Reuters poll. Uncertainty ahead of federal elections due in both countries next year, even though they are bound to be the most fragmented and difficult to predict in years, is not likely to interfere.
Brazil's benchmark Bovespa stock index is forecast to rise 1.3 percent by the end of 2017, according to the median of 14 estimates, and then rise another 16 percent to 89,950 by the end of 2018. That would mark a third straight year of gains, the longest winning streak in a decade during which the index more than doubled. Mexico's benchmark S&P/BVM IPC stock index is also expected to cap a three-year string of advances next year totaling 34 percent.
The survey underlines how a faster-than-expected economic recovery and record low interest rates in Brazil have renewed demand for local stocks, which for most of the decade have been passed over in favor of lower risk fixed-income investments.
"The rally so far has been built on hope, but now we're finally seeing the economic recovery take hold. That should give it a further boost," Vitor Suzaki, analyst at Lerosa Investimentos, said. Improving demand for goods and services, coupled with lower debt-servicing costs, are expected to boost corporate profits further as Latin America's largest economy edges further away from the deepest recession in over 100 years.
Sectors closely tied to the ups and downs of economic activity, such as retailers and consumer goods, financials and real estate, are likely to rise next year after leading gains in 2017, strategists said. Industrial companies, which have generally lagged this year's rally, could pick up the pace as efforts to cut debt and burn through inventories bear fruit.
Results in the latest Reuters poll also highlight investors' confidence that the next president will pursue structural reforms, such as streamlining the social security system, which they see as critical to boosting economic growth. "The elections are the big question mark for the market next year, but our base case scenario is that it will not lead to any big scares," said Frederico Sampaio, who helps manage 2 billion reais ($632 million) worth of stocks as head of equities at the Brazilian unit of Franklin Templeton.
His remarks come even as former president Luiz I. Lula da Silva, who many fear would turn his back on such belt-tightening measures, extended his lead in voting polls. Millions of Brazilians were lifted from poverty during Lula's 2003-2010 presidency. Still, many blame the heavy spending spearheaded by his successor Dilma Rousseff, who served as his chief of staff, for Brazil's recent economic woes.
But Lula, who has been convicted for corruption, may be barred from running if a higher court upholds his conviction. Brazil's gross domestic product (GDP) collapsed by 8 percent between the fourth quarter of 2014 and end-2016, but is now expected to grow 0.7 percent this year and 2.4 percent next, according to a central bank survey of economists.
Investors' attitudes towards the Brazilian election contrast with their uneasiness over the Mexican vote. Mexico's economy has been more resilient than expected this year as fears Trump could follow through on threats to impose punitive tariffs on exports of Mexican goods have not materialized.
A Reuters poll showed in September Mexico's economy should survive trade talks with the United States mostly unharmed. Mexican GDP is forecast to rise 2.1 percent in 2017 and 2.3 percent in 2018, according to the latest central bank survey.