--- Local investors to sit out until corporate results improve The prediction is modest compared to the 23 percent gain forecast for 2012 at the end of last year, which the Bovespa looks like falling far short of achieving.
"Considering everyone has been optimistic in the last few years and they were wrong, people are staying more conservative this time," said Andre Paes, a director at Infinity Asset Management in Curitiba, Brazil, who highlighted lingering concerns over Europe's debt crisis and global economic growth. Brazil's Bovespa is up around 5 percent in 2012, compared with a gain of over 16 percent in Mexico's IPC index and a nearly 14 percent rise in the S&P 500 index.
Investor concerns over heavy government intervention in Brazil's private sector and lacklustre economic growth have weighed on Brazilian stocks, with net foreign outflows from the Bovespa totalling 1.84 billion reais ($886.5 million) in the year through December 7. Recent jitters over fiscal negotiations in the United States have also sapped foreign demand for local shares.
"A lot of investors are looking at the Brazilian market as a sort of idiosyncratic play, with increased risk levels versus other names in the region," said Kathryn Rooney Vera, Latin America strategist at Bulltick Capital Partners in Miami. "The surprise on the upside would come from a more robust global recovery and the resolution of bigger global uncertainties."
While most analysts agreed that the Bovespa's fortunes would remain tied to global risk appetite and economic growth in Europe, the US and China, many also highlighted the positive impact of record-low domestic interest rates. With low rates leaving fixed-income investments less lucrative, more Brazilian pension funds and individual investors are expected to enter the equity market in search of higher returns, though such a migration has yet to occur.
"Unlike some other markets, it's hard to convince Brazilian investors to buy stocks when the market is low," said Anderson Luz, a partner at brokerage InTrader in Sao Paulo, who predicted the migration to stocks will come about following a better crop of corporate results. "They only want to jump on the wagon while it's going uphill." Shares linked to domestic consumption, including retailers, healthcare providers and education firms, are widely expected to continue outperforming commodities exporters, though some analysts believe oil producers and mining companies could see a recovery towards the second half of the year.
"Chinese and US demand could return and then we'll see a move away from so much emphasis on domestic consumption towards the externally-focused sectors," said Dany Rappaport, a partner with Investport in Sao Paulo. "While the market is still in an undefined phase and investors are still unsure, the tendency is that we'll see a migration to higher-risk investments," Rappaport said. "We need to see an improvement abroad first, though."