Market Strategy - Break Of Resistance Would Be Bullish Signal - 22 MAY 2017

The MSCI Brazil Index is set to test key technical levels, which could see the index make a break through multi-year downtrend resistance. A break higher would be a very bullish signal, suggesting that investors expect the market to continue to see upside, sustaining a robust rebound after bottoming in early 2016.

From a fundamental perspective, we remain cautious. Over the last two months, the market has performed in line with our view, trading sideways as investors await more encouraging signs of reform momentum ( see ' Additional Near Term Gains Likely Limited ' , March 8). High level corruption investigations have slowed reform momentum and increased the likelihood that pension reforms will under deliver anticipated fiscal savings, creating downside risks to economic growth ( see ' Corruption Investigations Will Slow Reform Momentum ' , April 17).

Moreover, Brazil's economy has yet to show clear signs of a rebound and we recently downgraded our real GDP growth forecast for 2017 to 0.5%, from 0.8% previously ( see ' Investment Key To Modest Recovery ', March 30). The downgrade reflects still-depressed conditions into Q217 and a dimming investment outlook in light of political uncertainty. From this perspective, Brazilian equities have begun to look comparatively expensive, with price-to-book ratios reaching levels seen amid much stronger growth conditions.

Sustained Break Of Resistance Would Require Shift In Sentiment
MSCI Brazil Index (Weekly)
Source: Bloomberg, BMI

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