Thu Mar 20, 2014 10:38am

SAO PAULO/MEXICO CITY, March 20 (Reuters) – After performing miserably over the past year, Brazil’s Bovespa index should move higher alongside a global economic recovery, a Reuters poll showed on Thursday, while Mexican shares will likely recover as market reforms take effect.

Brazilian stocks have fallen nearly 20 percent over the past 12 months, underperforming nearly every major stock index in the world. Investor concerns over higher interest rates, stubbornly elevated inflation, weakening government finances and a potential energy crisis helped spur the drop in local shares.

That decline was amplified earlier this year by a global sell-off in emerging-market assets, sparked by political turbulence in Turkey and Ukraine and the winding down of monetary stimulus in the United States.

Analysts in the Reuters poll conducted over the past week do not see the index falling from the 8-month lows reached this week.

They predicted the Bovespa would advance about 3 percent from Wednesday’s close to hit 48,000 points by mid-2014 and rise to 52,000 points by year-end.

That would put the index at just a 1 percent gain for 2014 and the median is far short of the 59,000 prediction in a December poll.

“The improvement won’t come from the Brazilian economy, which is going to remain weak, but rather because the market losses have been over-extended and the global outlook is one of recovery,” said Alvaro Bandeira, a partner with Orama Investimentos in Rio de Janeiro.

Bandeira highlighted sectors that have seen their share prices suffer the most in recent months as the most likely candidates to see a rebound.

Those include steelmakers such as Gerdau SA and Usinas Siderurgicas de Minas Gerais SA, whose shares are down about 23 percent and 37 percent respectively this year alone.

Other analysts suggested the best opportunities were in companies targeted towards Brazil’s still-growing middle class, such as education firm Kroton Educacional SA and insurance holding company BB Seguridade Participacoes SA .

Most of the 16 analysts polled said Brazilian stocks were at attractive valuations compared to developed markets, though few were confident in a strong recovery, citing a number of risks looming on the horizon.



Chief among them is Brazil’s presidential election, scheduled to take place in October. Some analysts expressed concern that a tight race could lead to additional government intervention in the private sector in order to boost short-term economic performance.

Polls show President Dilma Rousseff winning handily but her odds may change closer to the vote.

Other key risks include a sharp slowdown in top trade partner China, a potential credit downgrade, and productivity losses expected during the soccer World Cup, which Brazil will host in June.

“During the World Cup the country will be basically stopped. Then we have elections right after,” said Ariovaldo Santos, a trader with H.Commcor in Sao Paulo. “The fears of a downgrade, the risk of protests are still very much alive.”

Mexico’s IPC index, which has fallen around 10 percent over the past 12 months, should rise to 44,750 points by year-end, the poll showed, a 5 percent rise from 2013’s closing level.

Mexican stocks have been on a downward trajectory since the start of the year, like Brazil a victim of recent emerging-market jitters.

Still, local analysts were hopeful that major telecommunications, banking and energy reforms pushed through Congress last year will eventually contribute to greater foreign investment and economic growth.

Secondary laws will hash out the fine print of reforms approved last year that open up the energy sector to private exploration and aim to boost competition in the telecoms sector, dominated by a few large players.

Analysts also said an upgrade in Mexico’s sovereign credit rating by Standard and Poor’s in December has lowered Mexico’s risk profile among investors, which could help boost shares.