- Consensus call is for Brazil's currency rally to continue
- UBS recommends Ambev shares; Morgan Stanley cites BR Malls
President Dilma Rousseff looks to be on her way to getting impeached. What comes next for Brazil’s markets is less certain. Here’s what analysts and money managers are saying may be the best, and worst, performing assets in coming weeks and months:
One of the consensus calls among longtime Brazil observers is that the rally in the currency will continue. Standard Chartered’s Mike Moran says the real, which has already climbed 12 percent this year, will add to gains amid policy changes he expects following impeachment. Leonardo Monoli, a partner at Jive Asset Gestao de Recursos in Sao Paulo, the biggest independent buyer of distressed assets in Brazil, says it could get as strong as 3 per dollar -- an 18 percent advance from Friday. One factor that could limit any rally is the central bank selling reverse swap contracts -- last week, policy makers auctioned $24.7 billion to limit gains in the real.
The 33 percent rout in the real last year was a boon to exporters such as pulp producers Fibria, Suzano and Klabin. As the currency rallies, some of the advantages depreciation brought will be lost, according to Joe Bormann, a managing director for Latin America corporate finance at Fitch Ratings.
The cost to insure Brazilian bonds against nonpayment using five-year credit-default swaps jumped to as high as 533 basis points last year on concerns that Brazil wouldn’t be able to get a handle on its swelling budget deficit, signaling the country was more risky than lower-rated peers in the eyes of swaps traders. Ilya Feygin, a New York-based senior strategist at WallachBeth Capital, said if there’s a pullback in the rally in Brazilian securities, CDS are likely to hold up better than other asset classes because the price is already so high on a historical basis.
Buy swap contracts due in January 2017 because traders have overestimated interest-rate cuts this year, according to Bank of America Merrill Lynch analysts including Ezequiel Aguirre and Herve Belmas. Longer-term contracts, due through January 2025, are also attractive after the impeachment rally pushed rates too low, they said. "Whoever comes next will face the tough task of implementing the much needed fiscal reforms," they wrote in an April 14 report. Siobhan Morden, the head of Latin America fixed-income strategy at Nomura Holdings, said yields on Brazil’s 10-year dollar-denominated bonds could fall another 50 basis points.
State-Run Companies, Banks
Aggressive investors who can stomach the risk should go long on Petrobras and Banco do Brasil bonds, according to Citigroup analysts including Eric Ollom and Ayoti Mittra, who recommend the oil producer’s notes due in 2044 and the bank’s 9 percent so-called CoCo bonds with no maturity date. Other lenders and state-run companies are also good picks, the analysts said. "Developments in Brazil favor quasis and banks at the expense of exporters," they wrote. "Petrobras may have the most upside from a regime change."
Ibovespa at 65,000
The Ibovespa has climbed 23 percent this year, putting the index near the one-year price target for its individual stocks for the first time in a decade. Still, Morgan Stanley says Brazil’s benchmark stock gauge could gain another 22 percent to 65,000 if the new government shores up the budget and passes economic reforms. Among the stocks the analysts say could benefit most are mall operator BR Malls, lenders Bradesco and Itau Unibanco, retailers B2W and ViaVarejo, and toll-road operators CCR and Ecorodovias.
Morgan Stanley also includes Ambev in its best stocks to buy if things go well. UBS says the company is a buy no matter what. "Ambev is a beacon of light in a dark storm," UBS analysts including Lauren Torres and Guilherme Haguiara wrote in a report last week, adding the shares are "an attractive buying opportunity even when considering market uncertainty in Brazil."