Additional Downside For Bovespa Over A Multi-Month Period

The sharp decline in industrial metals prices seen over the last week reaffirmed our cautious outlook towards benchmark equity indices in Latin America that are heavily exposed to the effects of slowing Chinese growth, such as Peru's IGBVL, Chile's IPSA and Brazil's Bovespa. Conversely, we maintain a more constructive outlook towards regional equity indices of countries that have strong trade and investment ties to an improving US economy, such as Mexico's IPC. That said, the regional chart that stood out for us over the last week is the break of multi-year support around 46,200 by Brazil's Bovespa benchmark equity index, on which we hold a negative outlook due to its exposure to lower industrial metals prices, particularly iron ore, as well as relatively poor outlooks for the energy and consumer sectors in the coming months.

While the Bovespa could pare back some of its losses in the short term after declining by over 10.0% in the year-to-date, over a multi-month period we expect the index to remain in its broad downtrend, not ruling a move back towards trendline support around 40,000 this year. Indeed, a relatively weak earnings outlook for large iron ore producers, such as Vale, which is heavily weighted in the index, will likely keep the Bovespa under downside pressure in the coming months. Furthermore, while the prospect that state-owned oil company Petrobras, 11.1% of the Bovespa, could implement a more significant fuel price adjustment mechanism, easing pressure on the company's beleaguered downstream segment, buoyed sentiment last year, significant price hikes are unlikely before the general election in October 2014, and we see little substantial upside of the firm's share price at present. In addition, we expect that weaker private consumption growth this year, due in large part to the Banco Central do Brasil's ongoing rate hiking cycle and persistent exchange rate weakness, will cap gains on consumer stocks in the coming months, underpinning our relatively negative outlook on the Bovespa.

Key Break Of Support
Brazil - Bovespa Benchmark Equity Index (Weekly)

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