Brazil: Still long equities as focus shifts from inflation to growth

With clear signs of inflation rolling over, Brazilian equities are still our highest conviction EM equity exposure as prospective rate cuts should help offset near-term downside growth risks. As we highlighted last month, growth scares are opportunities to build exposure.

Our Brazil inflation LEI ticked down again this month, and underlying indicators confirm inflation has peaked (see Chart Collection). Meanwhile, Brazilian money market futures now discount the first rate cuts within 12 months. This is consistent with our BCB regime model falling further and nearing an “easing” regime.

With an easing cycle on the horizon, the favorable macro setup we first highlighted in early May is starting to play out. Stable external growth and a domestic recovery underpinned by falling rates are significant tailwinds for Brazilian equities. So far, foreigners have not bought in to the improving macro outlook.

Lagged negative effects from the tightening cycle will probably weigh on growth in the near-term, so we will rely on our tactical models to help time buying opportunities. For example, the latest dip tested the 1-year trailing VWAP and triggered our Breadth Squeeze Buy signal.