2) Brazil Gets a Leg Up
Brazil is getting a large share of inflows to emerging markets so far this year. That might be because of the country's flexible approach to monetary policy.
As risk aversion fades, JP Morgan writes that inflows have been key for a market rebound. Some 36% of inflows to emerging market equity funds went to Brazil. The Ibovespa, an index of about 50 stocks on the Sao Paulo Stock, Mercantile & Futures Exchange, is up more than 10% this January and foreigners have poured in $2.7 billion year to date, notes the firm.
After a horrible year for the Latin American market in 2011, Brazil in particular is seeing a strong turnaround. Last year, foreigners put 74% less into than Brazilian market than they did in 2010. This year, a surge in foreign inflows is suggesting that investors from abroad are a lot more risk inclined. In fact, JP Morgan notes that they're even quicker to catch on than their Brazilian counterparts are.
"Foreign investors reached 39% of Bovespa total volume (the best mark since March 2006) and ended 2011 as the main investor class of the Brazilian stock exchange. On the opposite side, retail investors flew from the Bovespa, as December registered their weakest participation since the beginning of the historical series. Retail investors now account for only 18% of total Bovespa volume. This last category suffered significant losses compared to last year, when their average participation reached 26.5%. Institutional investors' participation remained flat in December with 32% of the market share."
As for why the firm is bullish on Brazil for 2012, it says that the macro environment is supportive. "We see Brazil as the country with the most policy flexibility in the emerging market universe, with the capacity to continue to cut interest rates and provide for fiscal stimulus if growth were to weaken," the analysts write, also noting that inflation seems to be easing this year.
The Bovespa Index current trades at 63,607 and JP Morgan analysts are forecasting 73,000 by the year end. That's a near 15% rise for the year. The firm recommends that investors buy cyclical stocks in Brazil. Think banks, homebuilders and retail.