Brazilian stocks will rally through the middle of next year, supported by government measures to boost competitiveness and bolster demand that will attract foreign investors dripping with abundant liquidity, a Reuters poll found. Brazil's benchmark Bovespa stock index will rise more than 7 percent to 65,000 points by year-end, the poll of 30 analysts predicted, and reach 70,000 points by mid-2013.
In contrast with the S&P 500 index and Dow Jones industrial average, which are both above 4-year highs, the Bovespa will not surpass its high-water mark for the year after concerns over a Greek exit from the euro zone contributed to a roughly 16 percent drop in the second quarter.
Foreign investors will continue to drive most of the index's advance. They have helped Brazilian stocks gain nearly 11 percent in the third quarter to date after the US Federal Reserve launched an aggressive monetary stimulus program and the European Central Bank acted to stem the euro zone debt crisis.
Shares of steelmakers and miners also benefited from an infrastructure investment package launched by China's government earlier this month.
"Even though (Brazil's) economy is accelerating and confidence is rising, the motor is really external," said Katherine Rooney Vera, a strategist with Bulltick Capital Markets in Miami. "It's the Fed flooding the market with liquidity, absolutely pushing investors to look for yields."
Net foreign inflows to the Bovespa totalled 2.27 billion reais in the month through September 20 and 5.25 billion reais in the year to that date. Institutional investors have also been returning to the Bovespa, as record-low interest rates lead them to search for higher returns.
Many of those investors have been attracted by the Brazilian government's efforts to boost a stagnant local economy, including lower interest rates, higher import tariffs, tax breaks on manufactured goods including cars and home appliances, and proposed tax cuts on household goods. President Dilma Rousseff's government also boosted the outlook for local industry by slashing electricity rates and renegotiating utility concessions earlier this month, though the move weighed on shares of some sectors due to investor fears over heavy government intervention.
Garcia said that regardless of intervention risk, "the tax breaks and energy cuts will offer us a more optimistic situation in the first half of next year" as Brazilian companies begin to present better results.
Still, potential challenges loom for Brazil's heavily commodities-weighted stock market, such as a continuing economic slowdown in China, which could drag on prices of raw materials such as iron-ore, soybeans and petroleum.
In addition, government efforts to limit a rise in Brazil's currency, the real, could lead officials to impose targeted tax hikes on capital inflows. Finance minister Guido Mantega said last week that if necessary, Brazil would "adopt new measures in terms of taxing of financial operations."
Brazil shocked investors in October 2009 by imposing taxes on some categories of foreign investment flows to local stocks and fixed-income securities. Back then, it said some of the flows constituted hot money and were harming the economy.
An improved outlook over the global economy could contribute to those flows as risk appetite increases.