HSBC sees improved Brazil risk, reward as Rousseff adjusts policies

Strategists at HSBC Securities are recommending investors take on additional risk in Brazil, where equity markets sank about 30 percent from this year's peaks, on signs that President Dilma Rousseff will undertake gradual, more market-friendly policy adjustments ahead of her second term.
In a client note distributed late on Thursday, a team of HSBC strategists led by Ben Laidler said the balance between risk and reward in Brazil's stock market improved after a recent sell-off and signals that Rousseff might fine-tune some of the economic policies she enacted in her first term.
Laidler estimates that the MSCI Brazil equity index could rise as much as 16 percent, up from a prior 6 percent gain forecast, in what he called an "out-of-consensus base case scenario." However, downside risks for macroeconomic indicators and earnings remain relevant, he added.
"From an equity strategy perspective, we are counter-consensus constructive on the second-term policy environment of the Rousseff government, and we continue to believe Brazil is a relatively 'easy' fiscal and monetary policy stabilisation case," the note said.
The report comes as most analysts are warning caution on Brazil, citing the country's swelling twin deficits, persistent economic stagnation and inflation, and growing political turmoil that may dampen part of Rousseff's second term. The MSCI Brazil has lost value every year since Rousseff took office, in 2011. The index gained 3.4 percent on Friday to 2,092.05, paring back losses to 5.7 percent this year.
Laidler's view has been bolstered by the central bank's unexpected increase in the central bank's benchmark overnight Selic interest rate and reduced currency intervention, as well as a recent fuel price hike at the refinery gate. The note said, though, that the appointment of a new finance minister should "set the tone for the administration." As such, the strategists trimmed back exposure to exporters on their model Brazil portfolio by removing shares of mining giant Vale SA and meatpacker Minerva SA, and scaled back holdings of state-owned companies like Banco do Brasil SA, the nation's largest bank by assets. They also recommended investors add so-called higher beta stocks like BM&FBovespa SA, the nation's sole listed financial bourse. High beta stocks often rise more than the overall market during bullish times or vice versa during a rout.