The Bovespa (IBOV) stock index may rally 25 percent to reach 70,000 for the first time since April 2011 as signs of an economic rebound make up for a likely increase in interest rates this year, according to Joaquim Levy, the head of Bradesco SA’s asset management unit.
“Maybe the worst is behind us,” Levy, who served as Brazil’s treasury secretary under President Luiz Inacio Lula da Silva, said today in an interview at his office in Sao Paulo, without giving a time frame for his 70,000 forecast. “We could see better growth figures in the fourth quarter, and also in the first quarter. In this scenario, you’d see earnings improving, giving support to the stock market.”
The central bank will start raising the target lending rate from a record low 7.25 percent by July to curb inflation that reached a one-year high last month, Levy said.
Brazil’s benchmark equity gauge has dropped 10 percent in the past month, the worst performance among 94 major global stock indexes in local-currency terms. The index has been battered by government policies that forced electricity providers to lower prices, pressured commercial banks to reduce interest rates and required Petroleo Brasileiro SA, which is the country’s second-most-traded stock, to sell gasoline at a loss.
For equities to rebound, the government would have to “stop making noises” that could erode investors’ confidence in Brazil, said Levy, who manages 287.4 billion reais ($145.6 billion) at Bradesco Asset Management.
An eventual interest-rate increase could be seen as “market-friendly,” indicating that President Dilma Rousseff’s administration is seeking to create the foundation for balanced economic growth, he said.
Policy makers may lift the target rate by as much as 1.5 percentage points, said Fernando Barbosa, Bradesco Asset Management’s chief economist, without giving a time frame.
“The central bank will not tolerate this level of inflation,” Barbosa said. “They’re going to raise rates.”
His outlook is at odds with the median forecast of about 100 economists in a central bank survey, which projects the target rate will be unchanged this year.
While higher borrowing costs may “put some pressure” on Brazil’s currency, the government probably won’t let the real strengthen beyond 1.90 per dollar to avoid cheaper import goods from hurting local manufacturing, Barbosa said.
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