Emy Shayo, the Brazil Equity Strategist at JPMorgan: We think that the Brazilian market will offer a 14 percent total return in dollars over the next 12 months. The drivers for the market will be names that are related to the domestic economy (such as banks and real estate companies) rather than commodities. In the first half of the year, domestic names have been punished due to the uncertainties related to the interest rate cycle, as no rate hikes were expected in the beginning of the year. Today, the risks of higher interest rates have been fully priced in, which paves the way for a re-rating of domestic sectors. In our view, large banks and real estate companies can benefit from this higher visibility in the interest rate front. We highlight these sectors specifically as we think the fundamental drivers for growth are still intact, with bank credit low at 36 percent of GDP and a large housing deficit. We think that commodity names will not be as big a driver of the Brazilian equity markets as they were in the last few years. Higher global inflation and a sub-par growth performance in G3 economies are likely to provide for a less favorable environment for commodities. Overall, we continue to think that the Brazilian market is well supported. Although the top down story is somewhat less benign than over the last several years, on a bottom up view, most companies are well managed and have good upside potential.
Geoffrey Dennis, the Latin America Equity Strategist at Citigroup: We expect the Brazilian Bovespa to rebound by 10-15 percent to reach 66,000 by the end of 2008. Global markets should recover from their first half losses as 20-year valuation lows provide support, despite a further slowdown in the global economy and significant earnings downgrades. Ongoing weakness in the US economy will delay Fed tightening until early in 2009, another positive for global markets. If global markets rally to year-end, Brazilian equities should enjoy the ride. For sure, we remain concerned over the interest rate cycle in Brazil, with the Selic rate forecast to peak at 15.25 percent in early 2009. However, this robust monetary response to the inflation spike, combined with the ongoing primary budget surplus and the strong domestic economy are all positive factors for higher equity prices long-term. In truth, these top-down market factors are less important for the derivation of an index target than a bottom-up assessment of the key sectors in a market dominated by cyclical stocks. Therefore, our end-year target assumes: i) weakness in Energy as oil prices fall further; ii) a strong rebound in the oversold Materials sector, given attractive valuations and a bullish view of metals prices; iii) weakness of Financials and Real Estate as rates keep rising and iv) solid gains from other domestic sectors. In short, the Bovespa could fall sharply over the rest of 2008 if commodity prices crash (not our view) even if the domestic economy/sectors do well. The Bovespa is really no longer Brazilian.
Vinicius Silva, a member of the GEMs Equity Strategy team at Morgan Stanley: Our expected returns for emerging market equities, based on the broader MSCI EM benchmark, is for 20 percent in US dollar terms over the next twelve months. We have an overweight recommendation on MSCI Brazil and would expect it to return more than that within this time frame, which would approximately translate into the Bovespa potentially reaching 72,500 points by June of 2009. We don't put targets for any local emerging market index, however. On July 17, Morgan Stanley upgraded Brazilian equities to 'overweight', and improved Brazil's model ranking from twelfth to sixth place. Brazil has given back all of the performance generated since the country gained investment grade status. Emerging market funds are now underweight, in our view. Brazil's average valuation ranking in the model has improved while earnings growth expectations (25 percent for 2008 on Morgan Stanley estimates) remain among the strongest in the asset class. Brazil also ranks third on our composite business cycle indicator. We favor Energy, Materials and Financials exposure within the Brazilian market and prefer Brazil to Mexico. We are comfortable with our holdings in Brazil and our preference for natural resource stocks, represented via Petrobras and Vale. We also hold Unibanco to capture our more positive view on the sustainability of domestic demand growth in Brazil and the financial sector's positive track record during interest rate hiking cycles. Higher rates still present a risk to earnings for domestic oriented sectors, in our view. The other risk to our call is a sudden collapse in commodity prices, particularly oil. But we currently do not see conclusive evidence to believe that the likelihood for this scenario has materially increased.