Brazil’s Hot Stocks Get Fresh Boost From Russia’s MSCI Exit

(Bloomberg) -- The removal of Russia from benchmark indexes is providing another boost to one of the hottest emerging markets.

Brazilian equities are expected to receive $1.3 billion in inflows as investors relocate money after MSCI Inc. cut Russian shares from its widely-tracked developing-nation indexes, according to estimates by Itau BBA. That would come on top of $14 billion that foreign investors added to the Latin American country's stocks since mid-December.

Brazilian assets are among investors' favorites this year due to the nation's high yields, cheap stocks valuations and the rally in commodity prices. The Ibovespa index is the second-best performer in the world this year, up 21% in dollar terms, and the currency has strengthened 11%, more than any other.

“Passive capital will be redeployed across other EM countries, and Brazil will be a beneficiary,” said Malcolm Dorson, a portfolio manager at Mirae Asset Global Investments in New York. “Various managers also viewed Russian assets as a way to gain commodity exposure, so this should also bring more attention to commodity-producing countries,” he said.

Brazil's share of the MSCI benchmark is below 5%, down from 16.8% at the end of 2009 amid lackluster growth and the expansion of Asian markets. Latin America as a whole would receive about $2.1 billion, Itau BBA forecasts, as valuations are cheap across the region.

Even after this year's rally, Brazil's Ibovespa index trades at 7.7 times forward earnings, below its ten-year average of 11.7 times. The country's stock market has received foreign inflows for 49 straight sessions, with offshore investors pouring 70.8 billion reais ($14 billion) into equities since Dec. 17, Bloomberg data show.

Local traders said the removal of Russia from benchmarks was already boosting Brazilian assets on Thursday, strengthening the real by more than 1%. MSCI announced on Wednesday it will reclassify Russia indexes from Emerging Markets to Standalone Market status, with change being implemented when markets close on March 9. FTSE Russell will delete Russia constituents listed on the Moscow Exchange at a zero value on March 7.

Other emerging markets also may benefit from fresh inflows. Mizuho Bank Ltd. said India and China could be beneficiaries, and Samsung Asset Management said capital flows may pivot to Indonesia and Malaysia, which like Russia are commodity-based economies.

“It would not surprise me if Latin America becomes the next most favorable destination for emerging-market fund flows,” said Vincent Deluard, a macro strategist at StoneX Financial Inc. Brazil “really has every box checked-- very undervalued currency, commodity rally, and political risk relief once you get past the election.”