Brazil stocks are on the cusp of a massive rally if UBS is right

Bloomberg

The optimism sweeping Brazil’s stock market has reached nose-bleed levels. Analysts are predicting massive gains over the next 12 months on the back of Jair Bolsonaro’s likely win in this weekend’s presidential runoff, saying that he could send stocks to unprecedented highs if he aggressively pursues measures to shore up government finances. The right-wing lawmaker and his economic adviser, Paulo Guedes, are seen as godsends by investors enamored of their promises to rein in budget deficits, remove restrictions on the massive agriculture industry and privatise some state-owned companies.
UBS Group AG strategists Sambuddha Ray and Alan Alanis are emblematic of the euphoria. After months of tepid recommendations on Brazil’s stocks, they’re now telling investors that the Ibovespa could rally almost 40 percent over the next two months. And they’re far from alone, with Banco Bradesco SA and and Citigroup Inc. both predicting surges and investors from Schroders Plc to NCH Capital saying they’re adding to their Brazilian holdings.
“We are pretty bulled up,” Ray said in an interview. Now to be clear, there’s a big caveat to all these forecasts for a boom. Not only does Bolsonaro need to win the runoff — the political consultancy Eurasia Group puts the odds at 85 percent — he also must move aggressively on the pension changes and other fiscal overhauls investors say are desperately needed to shore up the budget. They want to see him whipping up public support, cutting deals in Brazil’s unruly congress and turning vague promises to bolster the economy into specific proposals.
“Part of the electoral risk has been removed and a Bolsonaro win is quite likely,” said Evandro Buccini, the chief economist at asset manager Rio Bravo Investimentos. The firm, which is owned by Chinese conglomerate’s Fosun, has 12 billion reais ($3.2 billion) under management. “Now, the biggest risk is execution.”
The optimists think they have an ally in Guedes, Bolsonaro’s economic adviser. A University of Chicago-trained economist and founder of private equity firm Bozano Investimentos, he’s seen as the architect of the candidate’s business platform. While some currency analysts have expressed doubts about Bolsonaro’s ability to push through the reforms, for now stock
investors are demonstrating confidence in the outlook.