New Floor for Brazil Rates Gives Fresh Boost to Rallying Stocks

(Bloomberg) -- A deeper-than-expected monetary easing cycle in Brazil is providing another reason for the world’s second-best performing stock market over the past 12 months to keep rallying.

The equity benchmark Ibovespa has jumped 20% this year. A dovish post-meeting statement from Brazil’s central bank has prompted economists and investors to see higher odds of the Selic rate sliding below 5%, a move that could further spur flows to local equities.

“The rotation to equities is only at the beginning,” said David Beker, Bank of America Merrill Lynch’s Sao Paulo-based Latin America equity strategist. “As rates head to a low ‘new normal,’ funds should continue to migrate to the local stock market,” Beker said in an interview.

Beker expects the benchmark interest rate to end the year at 4.75%, but believes there are risks skewed to the downside. BNP Paribas SA cut its Selic forecast to 4.25% at the end of the first quarter next year, as policy makers try to revive activity in Latin America’s largest economy. Under this scenario, companies from sectors that are more linked to the local economy, such as real estate and retailers, are poised to benefit the most, according to MZK Investimentos’ Sao Paulo-based portfolio manager Fernando Siqueira.

A long position in Brazilian stocks has been almost a consensus among the country’s hedge funds. Last month, legendary fund manager Luis Stuhlberger’s Verde Asset Management increased its exposure to local equities. According to data compiled by Bloomberg, the average analyst estimate targets a level of 119,000 for the Ibovespa in the next 12 months -- an upside of about 13% from current levels.

Ibovespa rose as much as 1.4% to 106,001 Thursday, with shopping malls including BR Malls, Multiplan and Iguatemi among the best-performing names. The index’s close record and intraday record are 105,817 and 106,650, respectively.

To contact the reporter on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Steven Fromm

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