Brazil stocks rally likely near end as impeachment looms - Reuters poll

[April 01, 2016]  By Silvio Cascione and Miguel Gutierrez

BRASILIA/MEXICO CITY (Reuters) - A recent surge in Brazilian stocks has probably run its course, a Reuters poll of equity market strategists showed on Friday, as investors' optimism about the growing chances that President Dilma Rousseff will be impeached is lessened because of concerns about her possible successor.

The same survey also suggested limited upside for Mexican stocks after the country's benchmark IPC index hit a nearly two-year high earlier this month.

As in recent Reuters polls on Brazil's economy and foreign exchange market, equity strategists do not have a strong consensus on the outlook for the nation's stocks in coming months, given the heightened political crisis.

The 14 forecasts collected in the past week for the benchmark Bovespa index at the end of 2016 <.BVSP> ranged from 42,000 to 65,000 points, implying a drop of 16 percent or a rise of 30 percent from Thursday's close.

However, only three strategists forecast the index at or above 60,000, a line not crossed since 2014. The median forecast in the survey projected the Bovespa at 52,150 points at year-end, just 4 percent above the current level.

Brazilian stocks rocketed nearly 40 percent from a 2009 low in January, catching many off-guard as the political crisis appeared more likely to abbreviate Rousseff's presidency.

The rally contrasted with the poor state of Brazil's economy, which has been going through the second year of its worst recession in more than a century. Output is set to shrink more than 3 percent for the second straight year, partly due to one of the world's highest interest rates <BRCBMP=ECI>, at 14.25 percent, and nearly double-digit inflation <BRCPI=ECI>.

Strong demand from foreigners helped boost local shares after a steep depreciation of the exchange rate made them cheap in dollars.

But markets have started to temper their optimism because of concerns that Michel Temer, leader of the fractious PMDB party, would replace Rousseff if she is impeached as most analysts expect.

Despite promises from Temer of market-friendly measures to take Brazil out of a crippling recession, investors have questioned his ability to put together a solid coalition in a fragmented parliament as he and other PMDB leaders are investigated in the same corruption probe implicating Rousseff and her party.

"A Temer government would be more market-friendly, but we suspect that much of the good news is now priced in," said Neil Shearing, chief emerging markets economist at Capital Economics.

Some analysts remain bullish, such as strategists with HSBC and Bank of America Merrill Lynch. Both banks recently moved Brazil to "overweight" in their portfolios.

"An improvement on the political front would allow fiscal measures to get congressional approval, resulting in a much stronger fiscal adjustment and a confidence shock," BofA Merrill Lynch analysts wrote.

They also bet on upcoming interest rate cuts by the central bank as inflation heads down.

In Mexico, the median forecast of 14 strategists for the IPC index <.MXX> at year-end stood at 47,500 points. In the first quarter, Mexican shares had their best quarterly performance since 2012, helped by diminished prospects of interest rate hikes in the United States and more stable oil prices.

Mexico exports mostly manufactured goods to the United States, its top trading partner. Last year, weakness in U.S. industrial output weighed on Mexican growth, and private consumption has helped support the economy.

(Editing by Lisa Von Ahn)

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