Brazil notched up two records this week. The Bovespa stockmarket index eclipsed 47,000 for the first time after doubling over the past three years and the Brazil risk index hit an all-time low, reflecting vastly improved confidence in the economy among foreign investors. No wonder: under Brazil’s left-wing government, inflation has been tamed and debt has fallen, while the currency has strengthened – a far cry from the days of the country’s rampant inflation.
The ongoing commodities boom has delivered a trade surplus and the domestic economy is strengthening, following 14 consecutive cuts in interest rates to a record low of just under 13%. Real household incomes were up by an annual 4.7% in January, underpinning retail sales growth of 8.5%. Brazil’s domestic economy has “excellent” fundamentals, analyst Daniel Gorayeb of Spinelli Corretora told Bloomberg. Bank lending rose for the 35th successive month in January and was up 21.4% year-on-year, and there’s scope for further credit growth in the economy: the mortgage to GDP ratio is still at just 2% (compared with 66% in America), says Merrill Lynch.
With GDP growth set to accelerate by 0.5% this year from last year’s 3%, earnings growth should be impressive. According to Merrill Lynch, earnings growth in dollars should reach 24% (29% excluding commodities) and companies’ return on equity should continue to exceed 24%. Brazil is on a forward p/e ratio of just ten, a “deep discount” to other emerging markets; its price/earnings growth ratio of 0.7 is also below Latin America’s one.
All this implies scope for a 24% rise in Brazilian equities in local currency terms over the next 12 months, reckons Merrill – more than any other market the bank covers. There is a London-listed ETF tracking the MSCI Brazil index (IBZL), while two consumption plays Merrill deems buys are
Unibanco (NYSE:UBB, $33) and domestic airline TAM (NYSE:TAM, $26). On the commodities front, Merrill Lynch likes iron ore supplier CVRD (NYSE:RIO, $40).