Morgan Stanley: Brazil Becomes Top Pick in Emerging Markets
In July and August, foreign investors shifted from sellers to net buyers of Brazilian stocks.
This reversal ended a downtrend from the earlier months, infusing optimism into Brazil’s financial markets.
Morgan Stanley reported that these investors acquired R$ 3.6 billion ($648 million) in stocks during July.
Additionally, they purchased R$ 7.0 billion ($1.26 billion) in August, with R$ 4.3 billion ($774 million) bought in just one week.
Moreover, Morgan Stanley suggests that a potential soft U.S. economic landing might draw more capital to Brazilian equities.
The bank’s analysts expect the U.S. Federal Reserve could cut interest rates starting September.
This forecast stems from the Federal Open Market Committee’s recent hints at an easing cycle beginning soon.
Consequently, Brazil now holds the top overweight position in global emerging markets portfolios managed by the bank.
Investors are reallocating funds from China and Mexico to Brazil, now overweight by about 2 percentage points.
In contrast, Mexico has moved to an underweight position due to risky government judicial reforms. Brazilian stocks currently appeal due to their attractive valuations.
The market trades at 8.9 times future earnings, well below the 14-year average of 11.7 times. This undervaluation suggests a compelling entry point relative to historical norms.
Morgan Stanley: Brazil Becomes Top Pick in Emerging Markets
This influx of foreign capital, notably between August 15 and 21, has partially offset the year’s earlier capital outflows.
The net decrease in U.S. interest rates, coupled with reduced fiscal uncertainty in Brazil, fuels this trend.
Despite these gains, institutional investors have pulled out R$ 16.3 billion ($2.94 billion) this year, with a negative August balance of R$ 11.4 billion ($2.05 billion).
Retail investors, too, have retracted R$ 20.3 billion ($3.66 billion) year-to-date, including R$ 3.2 billion ($576 million) in August.
This ongoing trend threatens to create the first net retail outflow since last December.
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