Strategist Who Called Bottom for Brazil Stocks Sees More Gains

(Bloomberg) -- Brazil stocks were still in the midst of a brutal sell-off when JPMorgan Chase & Co.'s Emy Shayo told clients in October that they offered the best entry point they would encounter in a while. The bet paid off and six months later she is confident there is more to come.

A combination of cheap multiples, surging commodities and easing fiscal concerns has turned the world's worst-performing stock gauge into a global winner this year. 

“This is a set up where commodity prices are in the driving seat, and that, in the past, led to years of strong markets,” Shayo, the head of equity strategy for Latin America at JPMorgan, wrote in a report. The Brazil's Ibovespa equity index “can easily” reach her year-end target of 133,000, up 11% from current levels and above the median estimate of a Bloomberg survey.

Prospects of a stronger Brazilian real could also keep driving strong foreign inflows, according to Shayo. The local stock market saw a net investments of about 65.3 billion reais ($14 billion) from non-residents in the first three months of the year, the largest quarterly inflow since at least 2008. 

To be sure, Brazil traders face risks including a sluggish local economy and surging interest rates across the globe. Volatility is expected to pick up ahead of the October presidential election, and Shayo notes that a key risk is whether the global economy will be thrown into a recession or not. 

Still, she says low valuations provide a cushion in case the outlook deteriorates. After climbing 37% this year in U.S. dollars, the Ibovespa index is trading at about 7.9 times forward earnings, compared to 11.4 times for Peru's S&P/BVL Peru General Total Return Index and 14.1 times for Mexico's S&P/BMV IPC Index. 

“Valuations remain undemanding at the same time that earnings are being revised higher,” Shayo said. 

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