Brazilian Stocks Eye Record Close

  • Corporate profit growth ahead as economy moves toward recovery
  • Political dangers for President Temer appear to be receding

Brazilian stocks are heading for a record close. Investors are rushing back into the country amid bets on corporate profit growth and a more stable political scenario after the incarceration of the former head of meatpacker JBS SA may have cleared the path for President Michel Temer and his reform agenda.

The Ibovespa advanced more than 2.1 percent today to 74,635.55, a record intraday high, leading gains among other global indexes. In the last 12 months, the Brazilian index has increased 28 percent in reais, its best 12-month performance since Sept. 2007, when the Ibovespa jumped 51 percent.

This is the first record for the benchmark index since May 20, 2008, and the streak of 2,306 trading days without such a high is unprecedented in Brazil.

The gains are a result from a mix of political and economic factors, according to Gustavo Gato, a fund manager at Explorador Capital Management.

"On the political front, chances of reforms have increased with the weakness of Temer’s enemies," Gato said by email. "The economy is finally showing benign signs with job creation, industrial production growth, retail sales picking up, etc, with still accommodative inflationary pressures. Rates are coming down and lowering the cost of capital at the same time that earnings growth is being revised up."

Investment banks are increasing their estimates for corporate profits on prospects of faster growth as inflation slows and the central bank has space to keep cutting interest rates. On Sept. 7, Bank of America Merrill Lynch raised its target for the Ibovespa to 75,000 points, seeing ample room for more exposure to Brazilian stocks in the local mutual fund industry.

"Companies have adjusted, reducing financial leverage," said Alvaro Bandeira, chief economist at Modalmais, Banco Modal’s brokerage arm. "The weaker dollar benefits those indebted in stronger currency."

While the impact of the arrest of Joesley Batista, the executive who turned JBS into a global powerhouse, is not entirely clear yet, president Temer’s allies see the jailing as possibly boosting him ahead of new corruption charges by Prosecutor General Rodrigo Janot, which are expected to be filed before the prosecutor’s term expires on Sept. 17.

"The market’s more focused on Janot’s imminent departure and, the fact that any second corruption charge brought by Janot against Temer is expected be weaker," Bandeira said.

— With assistance by Lu Wang

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