Long-Term Resistance Levels Likely To Limit Rally In Regional Equities

While sustained breaks of key technical resistance levels for several Latin American equity indices could spell some further upside for regional equities in the short term, we see little scope for long-term resistance levels to be taken out. Given our view for a slowdown in Chinese economic activity this year, despite potential for a small stimulus package, and our Commodities team's forecast for lower average industrial metals prices this year, we anticipate that a number of Latin American equity markets will face substantial headwinds in the coming months. As such, while the MSCI Latin America index has broken through support-turned-resistance around the 3,000 level and is now heading back towards a strong area of resistance around the 3,500 level, we believe that resistance will hold and the index will remain within its broader downtrend.

The recent rally has been driven in large part by surges in Colombia's IGBC equity index, Brazil's Bovespa, and Chile's IPSA, which have returned from negative territory earlier this month to post gains in the year-to-date ( see chart below). While we are relatively constructive on the IGBC, given a robust economic growth outlook in Colombia that will see earnings expectations rise, we hold more negative outlooks on the IPSA and Bovespa over a multi-month timeframe, as they are highly exposed to declining industrial metals prices and a structural slowdown in the Chinese economy.

Indeed, Colombia's IGBC is at technical crossroads, having broken through trendline resistance around 13,900 in recent weeks, but now re-testing resistance-turned-support. Should the index sustain this break and continue to push higher, the next key resistance level comes in around 14,900. We believe that this level will hold, as momentum indicators would look highly overstretched and valuations would have seen a substantial uptick following 25.4% of gains after the index bounced off long-term support at 11,900.

Downtrend To Be Tested
MSCI Latin America Equity Index

While sustained breaks of key technical resistance levels for several Latin American equity indices could spell some further upside for regional equities in the short term, we see little scope for long-term resistance levels to be taken out. Given our view for a slowdown in Chinese economic activity this year, despite potential for a small stimulus package, and our Commodities team's forecast for lower average industrial metals prices this year, we anticipate that a number of Latin American equity markets will face substantial headwinds in the coming months. As such, while the MSCI Latin America index has broken through support-turned-resistance around the 3,000 level and is now heading back towards a strong area of resistance around the 3,500 level, we believe that resistance will hold and the index will remain within its broader downtrend.

Downtrend To Be Tested
MSCI Latin America Equity Index

The recent rally has been driven in large part by surges in Colombia's IGBC equity index, Brazil's Bovespa, and Chile's IPSA, which have returned from negative territory earlier this month to post gains in the year-to-date ( see chart below). While we are relatively constructive on the IGBC, given a robust economic growth outlook in Colombia that will see earnings expectations rise, we hold more negative outlooks on the IPSA and Bovespa over a multi-month timeframe, as they are highly exposed to declining industrial metals prices and a structural slowdown in the Chinese economy.

IGBC, Bovespa And IPSA The Ones To Watch
Latin America - Major Equity Indices Rebased, December 31 2013=100

Indeed, Colombia's IGBC is at technical crossroads, having broken through trendline resistance around 13,900 in recent weeks, but now re-testing resistance-turned-support. Should the index sustain this break and continue to push higher, the next key resistance level comes in around 14,900. We believe that this level will hold, as momentum indicators would look highly overstretched and valuations would have seen a substantial uptick following 25.4% of gains after the index bounced off long-term support at 11,900.

Approaching Long-Term Resistance
Colombia - IGBC Equity Index (Weekly)

From a fundamental perspective, significant gains in the IGBC have been driven in large part by a substantial rally in oil stocks, which comprise 30.1% of the index, and the recent bounce has led us to question our relatively cautious stance on the sector ( see 'Equity Strategy: Watching For Signs Of An Inflection Point In O&G', April 7). The sustainability of oil production growth has long tempered our view on Colombian energy companies. However, some recent discoveries, as well as a licensing round scheduled for July, which has seen some interest from supermajors Shell, ExxonMobil and ConocoPhillips have helped to lead a rally in state-owned Ecopetrol and Canada-based Pacific Rubiales in recent weeks. Going forward, we will be watching the security environment closely, as insurgent attacks have weighed on company earnings in recent quarters, and the prospect of new discoveries, which could prompt our Oil & Gas team to upgrade its production growth forecasts for Colombia.

Recent Rally Does Not Indicate Change In Trend
Brazil - Benchmark Bovespa Equity Index (Weekly)

Following 15.0% of gains since bouncing off key support around 45,000, the technical picture for Brazil's Bovespa equity index is deteriorating, as the index sustained a false break through trendline resistance around 52,250 on April 8, a level we previously highlighted would hold ( 'Weak Fundamentals To Cap Bovespa Relief Rally', April 1). Moreover, momentum indicators on the daily chart look highly overstretched and valuations have ticked up notably in recent weeks. Given a weak economic growth outlook for Brazil this year, which will weigh on company earnings, and several sector-specific headwinds ( see 'Equity Strategy: Financials The Best Of A Bad Bunch', March 17), we believe the Bovespa will remain in its broad downtrend.

Not Ruling Out Further Upside, But 4,100 To Hold
Chile - IPSA Equity Index (Weekly) & RSI (bottom)

Chile's IPSA equity index is taking another run at trendline resistance around 3,800, a break of which could presage further gains towards key resistance around 4,100 ( see 'Equity Strategy: Remaining Cautious Amidst The Slowdown', March 7). However, we expect that this level will hold, as high frequency data continues to point to an economic slowdown in Chile and our Commodities team maintains its forecast for lower average copper prices this year, the country's major export. As such, we believe that there are few fundamental reasons to suggest a sustained uptick in earnings growth for Chilean corporates this year.

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This article is tagged to:
Sector: Country Risk
Geography: Latin America, Brazil, Chile, Colombia
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