Tariffs and trade war are the key factors afoot in world markets following last week's central bank-driven volatility. Emerging markets find themselves in the crosshairs with economies linked to Chinese exports hardest hit.
Article / 08 May 2014 at 9:04 GMT

Banco do Brasil is our most bullish call in emerging markets

Head of Equity Strategy / Saxo Bank

• Bank has attractive valuation and positive outlook
• Stock could double as economy expands
Brazil's equities surge 20 percent

By Peter Garnry

In the world of macro investors Brazil has long been highlighted as weak and ill-positioned in the life after the commodity super cycle. As a result, Brazilian equities have been one of the worst performing equity markets in the world over the past four years.

The Ibovespa Index the last five years

Ibovespa Index
Source: Bloomberg

Don't be fooled by macro

The chart below showing economists' forecast for 2014 growth really tells you the story about the ongoing negativity surrounding Brazil. But as you may know, if you have followed our views on equities for years, macro and equity investing are never a sure thing. The lead, lag and coincident nature between the two never repeat themselves. Often it is wise to be a buyer when everyone wants out - think Russia today. Brazil has the same smell but is there more to come following the 20 percent jump already from the bottom in March? Our view is certainly yes.

Consensus estimates for real GDP growth in 2014

Consensus estimates for real GDP growth in 2014
Source: Bloomberg

Banco do Brasil has massive upside 

While economic growth will be lower in 2014 than most expected in 2013, the country is still seeing growth and it is likely to accelerate to 2.2 percent and 3.2 percent in 2015 and 2016 respectively. With inflation around 5-6 percent per year the nominal growth rate is high and that will propel earnings and sales forward. Investors who do not want the currency risk can always hedge it forwards.

So what is our best in Brazil given the comeback? Our model is explicitly bullish on Banco do Brasil with a 12-month forecasted return of 27 percent (see PDF). The stock is already up 34 percent from the lows in March this year but our view is that this stock will make new all-time-highs within the next 12 months as investor sentiment on emerging markets comes back on full throttle.

Banco do Brasil trades at 6.9 times 12-month forward EPS, which makes it one of the cheapest major banks in the world. Price-to-book ratio is around one, which is ridiculous for a bank that has made 17-38 percent in return on equity over the past 10 years, significantly above the cost of equity. Long-term, this stock could more than double as the global economy continues to expand over the coming years. 

Banco do Brasil share price the last five years

Banco do Brasil share price the last five years
Source: Bloombeg

For most investors access to the Brazilian equity market is difficult so we recommend investors get exposure to Banco do Brasil through the liquid ADR in the US. (Saxo ticker: BDORY:xnas)

Read our full publication on emerging market equities in the attached PDF.

-- Edited by Kevin McIndoe

Peter Garnry is the Head of Equity Strategy at Saxo Bank. Please check out his articles and trades here on our exciting copy trading platform.

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Quant Corner - Emering Market Equities


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