Brazil could look like India in next 10 yrs if reforms continue: Swiss bank

UBS Group AG has an optimistic or very optimistic view on Brazil -- it all depends on the scenario you choose for the overhaul in the nation’s social security system.

The Swiss bank has already started to model an improving scenario for Brazil, on the back of the expected economic changes under the country’s new administration, which could improve the business environment. That includes a push from President-Elect Jair Bolsonaro’s team towards privatizing inefficient companies, potentially opening the economy to international trade and reducing the state’s interference with companies in the private sector.

“If he can do both big projects, the micro changes in Brazil and the pension reform, it’s not unlikely that Brazil could look like India in the next 10 years or so,” said Jorge Mariscal, the chief investment officer for emerging markets at UBS Wealth Management in New York. “Brazil could be entering this stage,” he said in an interview.

According to Mariscal, Latin America’s largest economy might follow India’s path, seeing an accelerated, consistent pace of growth amid the implementation of a more liberal agenda.

Growth Expectation
 

India's GDP is expected to expand 7.5% in 2018, versus +1.3% for Brazil

A lack of progress on pension reform or any other delay in Bolsonaro’s fiscal plans would result in a failure to improve Brazil’s debt dynamics and disappoint markets, he said. Investors have been waiting for an overhaul to the country’s burdensome pension system for years. Many foreign players have stayed out of Brazilian markets, especially stocks, as they wait for signals Bolsonaro has the political capital to push through with the unpopular bill in Congress.

UBS, though, has been favoring Brazilian equities over the currency and bonds on the view that the micro changes -- like the sale of state assets -- will be easier to implement. Mariscal sees the outflow as a result of global concerns and says investors are turning increasingly more constructive on the country, while becoming more negative regarding Mexico.

“Things that he can do in the deregulation front will improve the profitability of doing business in Brazil,” he said.

Global concerns have led to a significant foreign outflow from Brazilian stocks over the past months, Mariscal said. But despite a tougher international backdrop, Mariscal senses global investors are increasingly more constructive on the country, while becoming more negative regarding Mexico. “I see a very positive change in the attitude in the investment community outside Brazil towards Brazil,” he said.

Among emerging-market nations, UBS finds China, South Korea and Indonesia trading at attractive valuations.