Fed, Brazil reforms likely to sustain Latam equity rally

Latin American stocks will keep rising in the coming year, with investors snapping up Brazilian shares on hopes a budget reform will bring down borrowing costs, a Reuters poll showed.
The Brazilian benchmark Bovespa stock index is expected to gain 1 percent by the end of this year and 9 percent by the end of 2017 from Monday's close, having risen 37 percent so far this year, according to the median forecast of 13 strategists in the poll.
Equity gains in Mexico are expected to be similar, also at 1 percent through the end of this year and 9 percent by the end of 2017, according to the median of 14 forecasts in the poll.
The expected gains would put the Bovespa index at 60,000 points at the end this year and 65,000 at the end of 2017, which would be the highest since 2012. Mexico's IPC index is projected to end 2016 at 48,000 points and 2017 at 52,000, an all-time high if confirmed.
Investors renewed their optimism about further equity gains in Latin America after the US Federal Reserve signalled a cautious approach in its process to normalise monetary policy, with inflation still subdued. Any surprises to the contrary were mentioned by strategists world-wide as the biggest risk to estimates, followed by weak corporate earnings.
This year's rally in Brazilian and Mexican stocks have already made them expensive in light of corporate earnings, especially in Brazil as the country struggles with a two-year-long recession that is set to be its worst on record.
Still, many strategists in the poll said they see more upside for Brazilian shares, betting a federal spending cap proposed by President Michel Temer will end a budget crisis and pave the way for steep interest rate cuts by the central bank throughout 2017.
The benchmark interest rate is currently at 14.25 percent, a decade high. Markets are pricing in more than 300 basis points in rate cuts over the next year, but economists have said a successful reform agenda could allow for much steeper rate cuts, possibly to less than 10 percent by 2018.
"A key catalyst is the approval of reforms, such as the expenditure cap, which would help the fiscal adjustment and could be voted on by the Lower House in October," wrote Bank of America Merrill Lynch analysts Felipe Hirai and Nicole Inui.
Strategists noted Latin American shares, especially Mexican, are vulnerable to sharp swings ahead of the US presidential election. Mexico's central bank chief on Friday said a Donald Trump victory in November would hit Mexican markets like a hurricane.