Market Strategy - Brazilian Equities Defy Underlying Weakness - APR 2017

The MSCI Brazil Index appears set for additional gains after breaking through strong resistance levels. The bullish move has been sustained over the last week, against our more sceptical stance toward the market's rally, which we expected would reverse in light of technical resistance and overbought momentum indicators ( see ' Brazilian Equities Look Ripe For A Reversal ' , February 8). Although the real 's recent gains have helped drive the market's recent rise, the break higher suggests that investor sentiment toward the country is shifting on the expectation that economic activity will rebound in the coming months.

The market is likely to remain in a higher trading range over the coming weeks, as the index faces no significant levels of resistance. As we previously suggested could be the case, investors appear to be taking a bullish view on the Brazilian economy in light of rising commodity prices, disinflation and falling interest rates, and the adoption of more business-friendly policies by the administration of President Michel Temer ( see ' Break Higher Would Be Bullish Signal ' , January 27). Indeed, financial markets appear to largely be shrugging off the most recent data, which showed continuing weakness in the real economy ( see ' Quick View: Still No Signs Of A Recovery ' , February 16).

Nonetheless, we remain cautious on the extent of additional upside likely for Brazilian equities over the coming months. Brazilian stocks have already rallied substantially over the last year and momentum indicators still look overbought. We expect that significant slack in the economy, including elevated unemployment and idle productive capacity, will limit growth in the real economy over 2017, which could disappoint investors' earnings expectations.

Bullish Break Suggests Additional Upside
MSCI Brazil Equities Index (Weekly)
Source: Bloomberg, BMI

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