Goldman Skeptical on Brazil’s World-Beating Stock Market Rally

(Bloomberg) -- The rebound that made Brazil home to the world's best-performing stock market this year isn't getting Goldman Sachs Group Inc. very excited.

While the tightness in global commodity markets could be supportive in the near term, prospects of tepid growth for Latin America's largest economy and anticipation that inflation will remain above 6% until 2023 should weigh on the local market, strategists led by Caesar Maasry wrote in a report dated Apr. 5. 

“We are skeptical a sustained bull market is ahead of us,” Maasry said. “Commodity markets may provide support for portions of Brazilian equities, but we think the external backdrop is not enough to boost Ibovespa significantly higher.”

In fact, Maasry's year-end target for the nation's benchmark Ibovespa index was the second-lowest in a recent survey by Bloomberg. At 116,000 points, it implies the index has the potential to drop about 2% from Tuesday's close. Maasry also has a 12-month target of 118,000 for the commodity-heavy stock gauge. 

After climbing 34% this year in U.S. dollar terms, the Ibovespa trades at about 7.8 times forward earnings, below historical averages and compared to 14.1 times for Mexico's S&P/BMV IPC Index. 

Read More: After 73% Collapse, Latin American Stocks Finally Start to Soar 

But even as some strategists expect interest rates will peak in coming months and flagged a potential easing cycle at some point next year, Goldman sees the more likely outcome -- “a modest decline in rates” -- could still favor fixed-income investments. 

“Further equity outperformance against local fixed income is a ‘tall order' from current levels,” Maasry says. 

©2022 Bloomberg L.P.