A visitor views the electronic board displaying stock activity at the Brasil Bolsa Bacao (B3) stock exchange in Sao Paulo, Brazil. (Photographer: Patricia Monteiro/Bloomberg)

Brazil Stocks Are on the Cusp of a Massive Rally If UBS Is Right

(Bloomberg) -- The optimism sweeping Brazil’s stock market has reached nose-bleed levels.

Analysts are predicting massive gains over the next 12 months on the back of Jair Bolsonaro’s likely win in this weekend’s presidential runoff, saying that he could send stocks to unprecedented highs if he aggressively pursues measures to shore up government finances. The right-wing lawmaker and his economic adviser, Paulo Guedes, are seen as godsends by investors enamored of their promises to rein in budget deficits, remove restrictions on the massive agriculture industry and privatize some state-owned companies.

UBS Group AG strategists Sambuddha Ray and Alan Alanis are emblematic of the euphoria. After months of tepid recommendations on Brazil’s stocks, they’re now telling investors that the Ibovespa could rally almost 40 percent over the next two months. And they’re far from alone, with Banco Bradesco SA and and Citigroup Inc. both predicting surges and investors from Schroders Plc to NCH Capital saying they’re adding to their Brazilian holdings.

“We are pretty bulled up,” Ray said in an interview.

Brazil Stocks Are on the Cusp of a Massive Rally If UBS Is Right

Now to be clear, there’s a big caveat to all these forecasts for a boom. Not only does Bolsonaro need to win Sunday’s runoff -- the political consultancy Eurasia Group puts the odds at 85 percent -- he also must move aggressively on the pension changes and other fiscal overhauls investors say are desperately needed to shore up the budget. They want to see him whipping up public support, cutting deals in Brazil’s unruly congress and turning vague promises to bolster the economy into specific proposals.

“Part of the electoral risk has been removed and a Bolsonaro win is quite likely,” said Evandro Buccini, the chief economist at asset manager Rio Bravo Investimentos. The firm, which is owned by Chinese conglomerate’s Fosun, has 12 billion reais ($3.2 billion) under management. “Now, the biggest risk is execution.”

The optimists think they have an ally in Guedes, Bolsonaro’s economic adviser. A University of Chicago-trained economist and founder of private equity firm Bozano Investimentos, he’s seen as the architect of the candidate’s business platform. While some currency analysts have expressed doubts about Bolsonaro’s ability to push through the reforms, for now stock investors are demonstrating confidence in the outlook.

The Ibovespa has surged 29 percent in dollar terms since polls started showing a jump in Bolsonaro’s support in mid-September, the best performance among more than 90 equity gauges tracked worldwide by Bloomberg. It’s up almost 10 percent since Bolsonaro took the most votes in the first-round ballot on Oct. 7, beating Fernando Haddad of the Workers’ Party by 17 percentage points. On the first session after the vote, Brazilian stocks saw a 1.67 billion real inflow from foreign investors, according to exchange data.

Brazil Stocks Are on the Cusp of a Massive Rally If UBS Is Right

Schroders is one of the overseas firms buying Brazilian stocks.

“We have increased our position slightly to Brazilian equities and continue to be positive,” said Pablo Riveroll, an emerging-market equities fund manager in the firm’s London office who oversees $247 million of assets. He favors state-controlled companies, homebuilders, banks, utilities and discretionary retailers among the country’s stocks.

Citigroup Inc. predicts the Ibovespa will jump 21 percent to 104,000 by the middle of 2019 on the back of fiscal and economic reforms.

Branco Bradesco says the gauge could reach as high as 120,000 in the next 12 months if the new president pursues a strategy of aggressive fiscal tightening. Even a partial fix should boost the stock benchmark toward 100,000, the bank says.

The six-digit level could easily be breached over the next months, according to James Gulbrandsen, the chief investment officer at NCH Capital in Rio de Janeiro, which has $3 billion of assets under management.

UBS turned positive on Brazilian equities after Bolsonaro’s strong first-round showing, saying that the reduction in political risk combined with attractive valuations could push the stock gauge to 119,000 by the end of the year under ideal circumstances. The base case scenario has the Ibovespa at 100,000.

“All the optimism is now back,” Ray said.

©2018 Bloomberg L.P.