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Bovespa: Brasil Stock Market Will Surpass 100,000 Points

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The year of key presidential elections that closes in Latin America also ends with a well-known strategy that gains ground among the trading desks in stocks: buy Brazil and sell Mexico.

The latest Reuters poll shows Brazil’s benchmark stock index, Bovespa, extending this year’s bull run to 2019 to end the year at 107,500 points, according to the median of 10 surveyed operators and strategists.

If its forecasts that the index will close 2018 at 92,000 points are specified, it would imply an annual increase of 17 percent in 2019, which would total an expansive streak of 150 percent from the end of 2015.

In comparison, the Mexican index S & P / BVM IPC would end 2018 at 45,100 points and then rise 11 percent the following year to 50,000, which would deliver a return just above the country’s benchmark interest rate of 8 percent.

This scenario would imply a continuation of the divergent behavior between both countries, which led the respondents to raise their forecasts for the actions of Brazil at the end of 2018 compared to the previous survey, carried out in August, and reduce those of Mexico.

“The performance of the past weeks is a sample of what we expect for Latin American stocks in 2019,” strategists at Itaú BBA said in a report. “Our discussion of individual markets in Latin America is increasingly relevant given the highly divergent paths followed by these two markets since October 1.”

The comments highlight how the victories of the left and the right in the presidential elections in Mexico and Brazil, respectively, have once again marked the scale of investments between the two main markets in the region, which usually compete for those seeking exposure in Latin America.

The Brazilian index has risen nearly 12 percent this year after far-right legislator Jair Bolsonaro won the election. The president-elect has appointed a banker trained at the University of Chicago as the future finance minister, with the task of reducing a large fiscal deficit.

Brazil’s recovery from its deepest depression in decades, although slow and overwhelming, boosted those gains, particularly as the central bank kept its rates to all-time lows.

Although easing concerns about the fiscal situation will require Bolsonaro to negotiate an unpopular reform of the country’s expensive pension system with a fragmented Congress.

Itaú economists recognize that the continuation of the rise in the shares will depend on the success of that process.

In contrast, the Mexican stock index has fallen 20 percent this year, mostly in the last two months. Many of those who answered the survey, in fact, declined to respond at this time as they were reviewing their estimates.

The main trigger for the wave of sales was the cancellation of an airport project partially built in Mexico City by President-elect Andrés Manuel López Obrador. The president decided to follow the results of an informal referendum that called for abandoning the project.

His team plans to hold a public consultation, the second of its kind, on a variety of issues including a new refinery, a policy that has generated confusion among investors who expect an agenda of fiscal austerity and deregulation.

The central bank of Mexico said earlier this month that the incoming president’s policies risk inflaming inflation and triggering a rise in interest rates to near 10-year highs.