Itaú BBA - Brazil to outperform peers in new external environment

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Brazil to outperform peers in new external environment

January 27, 2017

The adjustment of Brazilian external accounts in 2016 and the ongoing fiscal reforms contrast with uncertainties on other EMs.

For the full report, see enclosed file

Highligths

  •  Global GDP growth is set to accelerate to 3.6% this year from 3.1% in 2016 and there are upside risks. Global inflation is also on the rise, driven by better commodity prices. With better economic outlook, interest rates are set to rise in developed countries.
  • The main risks at the moment are political shifts in the U.S., Brexit and elections in Europe. China also poses risks, but we see a stable growth environment in 1Q17.
  • Amid this external environment and less gradual monetary policy normalization in the U.S., we think Brazilian fixed income markets have a comparative advantage vis-à-vis large EMs.
  • The strong adjustment of Brazilian external accounts that took place in 2016 and the ongoing fiscal reforms debate contrast with idiosyncratic uncertainties weighing on Mexico, Turkey and South Africa.

     

  • Such improvement in Brazilian fundamentals suggests the expected changes in external liquidity will have a diminished impact over the BRL’s volatility relative to other high-yielders.
     

 



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