While many Latin American stock markets took a hit during the second quarter as the global economic recovery sputtered, Brazil's benchmark Ibovespa index has not only been the worst performing in the region but also one of the weakest in the world.
Global crises such as the earthquake, tsunami and nuclear meltdown in Japan and Greece's continuing debt woes have crimped the economic recovery and weighed heavily on the index of Latin America's biggest economy. The commodity-heavy Ibovespa lost 9% in the second quarter, as Brazilian policy makers raised interest rates to stem inflationary pressure.
Yet, with Greece securing its second bailout in as many years and as the impact of Japan's calamity ebbs, growth and inflation expectations in Brazil are likely to stabilize. All that could lead fund managers to start buying again, including Federated Investors' Audrey Kaplan, who currently has an "underweight" position on Brazil stocks.
"On the valuation perspective, Brazil is coming back in line after getting very expensive, and in the economy we're looking at a bit more stability," said Ms. Kaplan, co-head of international equities at Federated. "If we see signs that things have started picking up in the second half and we look to 2012 as a different year, with less concern about inflation, then we may increase our holdings."
Brazil trades at about 10 times earnings, while emerging markets are trading at about 11 times, Ms. Kaplan said. The brokerage arm of Banco Bradesco expects valuations to climb to 12 times and the Ibovespa to hit 73000 by year's end—thanks also to a 13% growth in per-share earnings. The index closed the quarter at 62404.
Expected earnings growth and improvement in inflation should, Bradesco figures, "trigger major improvement in sentiment" toward the Brazilian stock market, by far Latin America's biggest with total market capitalization of more than $1.5 trillion.
Elsewhere in the region, the recovery in Mexico, Latin America's second-biggest economy, also will be largely dependent on external factors, said Greg Lesko, fund manager at Deltec Asset Management. The country's IPC index of most-traded shares slipped 2.4% during the second quarter as it tracked weaker oil prices but was buoyed somewhat by a solid recovery in U.S. manufacturing.
On the other end of the spectrum as one of the region's better performers was mining power Chile. The IPSA Select index climbed 3.7% during the second quarter, due in part to high copper prices. Though prices have retreated from records, they have helped buoy the country's stocks.
Meanwhile, the question in Brazil, one of the world's highest-profile growth economies, isn't whether its stock index will recover but rather at what pace the recovery will be. Analyst opinion varies widely amid inflation and growth uncertainties. Banco do Brasil expects the index to rise to 70000 by this time next year, while Banco Santander sees the index at a colossal 89000 by the end of 2011.
"I'm optimistic that we will have a better second half," Deltec's Mr. Lesko said. "Whether that will happen in the third quarter or fourth quarter will depend on external factors" such as the working-out of Europe's debt problems, he said.
Source: http://online.wsj.com
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