Brazil stock market bulls still charging as economy heats up

Confidence in Brazil's stock market rally remains unshaken heading into a third year, a Reuters poll of brokers, investors and strategists showed, with optimism around a stronger economy outshining the government's inability to plug a fiscal deficit.
The benchmark Bovespa stock index is likely to rise around 6 percent to a record high of 91,250 by year-end, according to the median of 14 estimates collected February 16-21. A Reuters poll taken a little over a year ago underestimated the 27 percent 2017 Bovespa rally, which finished at just over 76,000 points. The forecast was 72,000.
If the latest survey results are correct, the Bovespa will mark a 20 percent gain this year, capping off a 111 percent rally since the end of 2015, easily making Brazil one of the world's best-performing stock markets. Stocks soared last year as the economy emerged from its deepest recession in decades.
Household spending spiked thanks to slow inflation and record-low interest rates, though unemployment rates held at double digits. Companies used the opportunity to cut debt, as the central bank slashed the benchmark interest rate by 750 basis points, the deepest easing cycle in 10 years.
The latest consensus view also ranks higher than the 89,950 end-2018 forecast in an October poll. Still, the index would remain short of peaks seen a decade ago when adjusted for inflation, interest rates or in dollar terms. With Latin America's largest economy poised to grow at the fastest pace in five years, rising demand should boost corporate revenues while record-low interest rates keep funding costs low, investors said.
"We've got a rebounding economy, well-behaved inflation and extremely low interest rates when compared to their recent history. It's not a bold prediction to say that stocks are going up," Raphael Figueredo, a partner at Eleven Financial, said. His optimism highlights a widely held view that a recent equities sell-off in developed markets poses little risks to stocks in emerging markets, which should benefit from a strong growth outlook both at home and abroad.
Shares of consumer goods firms and retailers, which last year underperformed the industrial sector, are bound to catch up in 2018, Figueredo said. Meanwhile, steady commodity prices are likely to boost shares of producers of basic materials. That should offset investors' uneasiness towards this year's elections, the hardest to predict in decades.
After President Michel Temer failed to gather lawmaker support for an unpopular plan to cut social security, triggering warnings from ratings agencies, it will be up to his successor to address growing public debt. As Mexico heads to its presidential elections, the survey suggested its benchmark S&P/BVM IPC stock index will turn higher in 2018 and end the year with a 11.6 percent rise, to 54,150.
Brokers and strategists who responded to the previous poll overestimated the size of last year's gains by nearly a factor of two. The index rose 8 percent last year to 49,354, compared to a consensus of 52,800, weighed down by investor worries over the presidential elections and the future of the North American Free Trade Agreement (NAFTA). Those factors are likely to keep a lid on further gains at the start of the year.
Concerns that Andr?s Manuel L?pez Obrador, who is leading presidential polls, could turn his back on fiscal responsibility or pursue nationalist policies that draw the ire of US President Donald Trump, are likely to restrain the market, respondents said.
That, combined with the lengthiness of negotiations between Mexico, the United States and Canada on NAFTA, was another reason some analysts lowered forecasts compared with the last survey in October. Then, they were expecting the index to climb to 57,500 by the end of 2018.
But even a victory by Obrador would not likely prevent further stock market gains, poll respondents said, as he would struggle to pass radical measures through Congress. Obrador has hinted he could be more pragmatic than previously suggested, naming US-trained economist Carlos Manuel Urzua as his potential finance minister.
Urzua kept Mexico City's public accounts in check while serving as finance minister for the local government between 2000 and 2003. "The market will be very cautious ahead of the presidential elections but it will react in a positive way in the second half of the year," Ve por M?s director of strategy Carlos Ponce said.