RIO DE JANEIRO, BRAZIL – According to UBS analysts, Brazil has everything to stand out among emerging countries in 2020. Among the factors that make the country the biggest Swiss bank bet for the year are advancing reforms, low interest rates over a long period, economic rebound and corporate profit growth, as well as a favorable global environment.
In its report “Brazil: Clear Skies Ahead” dated January 16th, Zuric-based UBS highlights that the country comes from a past of recession, followed by years of disappointment with economic growth, but that recent data, such as the 2019 manufacturing PMI (Purchasing Managers’ Index), show that a rebound in the economy is on the way and should benefit assets, particularly the stock market.
In the assessment of the financial institution, the combination of reforms, private sector-led growth, and low interest rates make up a “unique history”, placing the country ahead of other emerging markets. The bank estimates a potential upside of 13 percent to 15 percent for Brazilian equities in the next six to 12 months.
According to the bank, a drop in the dollar against the Brazilian real could mean an additional high of about seven percent, assuming an exchange rate of R$3.85, if the Central Bank closes the cycle of interest cuts.
For the next three years, UBS estimates a GDP of 2.5 percent for Brazil, driven by private credit and corporate investments, with room to reach three percent.
Growth of companies should drive shares
According to analysts, double-digit growth in companies’ profits will be the main trigger for asset performance in the coming months. For 2020, companies’ profit expectations are up 20 percent, while for 2021 an advance of 13 percent is expected, driven by a rebound in consumption, cheaper credit, and real wage growth.
The bank recommends exposure to sectors that should benefit from this scenario, such as banks, materials, and energy, as well as more defensive shares in food retail.
They recommend avoiding industrial segments that are considered expensive and would be impaired by an appreciation of the Brazilian currency, as well as the discretionary consumption and health sectors.
Foreign investors may return
Given the advance of reforms, the economic rebound and a favorable global environment for emerging economies, followed by positive news from the China-US trade agreement, Brazil should, according to UBS, benefit from the entry of foreign investment because of its “unique initial cycle of profit recovery and positive reform environment”.
In the local environment, the main catalysts on the horizon are the independence of the Central Bank and the advancement of administrative reforms, since UBS says it sees a “high probability” that they will be announced in the first half of this year, while tax reform should be left for a later stage.
Among the main risks, analysts mention a slowdown in the global economy, pressure on commodity prices, delays in the rebound of domestic economy and corporate profits, disappointment with the speed of implementation of structural reforms, a more devalued real and tensions in Latin America.