Brazil's Bovespa Will Rally 16% to Record by Year-End, Goldman Sachs Says

Brazil’s Bovespa stock index will gain 16 percent to a record 78,000 by yearend as “obstacles” are removed, including presidential elections and Petroleo Brasileiro SA’s share sale, Goldman Sachs Group Inc. said.

The central bank’s signal that it will hold borrowing costs through 2010 also boosts the prospects for Brazilian stocks, Stephen Graham and Andre Rezende, analysts at Goldman Sachs in Sao Paulo, wrote in a note to clients today. The benchmark equity gauge may rally 31 percent to 88,000 by mid-2011, they said.

“Timing for a rally seems propitious because obstacles that have blocked markets are being removed, while earnings are robust and estimates we think will rise further,” the analysts wrote. “The implications of flat rather than rising interest rates into 2011 are sinking in.”

The Bovespa slumped 2.2 percent this year before today on concern the $78 billion stock offering by Petrobras, which accounts for 12 percent of the index weighting, will dilute earnings. Petrobras plans to price the share sale Sept. 23. Speculation that swelling budget deficits could cause a debt default in Europe also damped demand for riskier assets, while concern that growth is slowing in the U.S. and China dimmed the outlook for commodities.

‘Robust Chapter’

“Brazil is typically seen as a healthy part of the long- term BRICs story,” Graham and Rezende wrote, referring to Brazil, Russia, India and China. “After 11 months of flattish trading, late 2010/early 2011 is shaping up to be an especially robust chapter of the story” as rising global confidence boosts the appetite for stocks, they wrote.

Dilma Rousseff, the chosen successor of President Luiz Inacio Lula da Silva, may bring “continuity” and seek to contain government spending if she wins elections next month, according to Goldman Sachs. Support for the former cabinet chief is at 51 percent, compared to 25 percent for her closest competitor, according to an Ibope poll published Sept. 17.

The Bovespa rose 1 percent to 67,748.24 at 11:16 a.m. New York time today. Goldman Sachs previously estimated the Bovespa would rise to 85,000 by the end of the year.

Not including retail and consumer-goods stocks, Brazilian stock valuations are “undemanding” compared to other emerging markets, Goldman Sachs said. The Bovespa is trading at 14.9 times reported earnings, compared to a ratio of 14.5 for the MSCI Emerging Markets Index, weekly data compiled by Bloomberg show.

Domestic Growth

The companies that benefit most from domestic growth should continue to outperform other Brazilian stocks through 2010, despite “stretched” valuations, Banco Santander SA said. The outlook for slower interest-rate increases especially benefits industries including transportation, banks and real estate, Marcelo Audi and Leonardo Milane, analysts at Santander, wrote in a note to clients today.

“An expected softer monetary tightening makes a hard landing in 2011 GDP growth less likely,” said the analysts, based in Sao Paulo. “If anything, a new positive risk is for a stronger economic momentum for longer.”

Brazil’s gross domestic product may expand 7.5 percent this year and 4.5 percent in 2011, according to the median forecast in the weekly central bank survey of about 100 economists published today.

To contact the reporter on this story: Alexander Cuadros in Sao Paulo at acuadros@bloomberg.net

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