The investment research group at UBS has just published its strategy outlook for 2012 in its latest “Global Emerging Markets Strategy” report… here are the highlights of the 32-page report with their Brazilian stocks recommendation:
Brazil and BRICs outlook
Given the uncertain market environment we are in, we advocate a defensive strategy. We are overweight sectors related to emerging market consumption, which offer some protection from lackluster demand in the West. We recommend high ROE, lowly indebted, dividend paying, stocks.
We prefer those markets that have a strong underlying secular growth story, in which internal consumption and investment are the key driving forces behind that growth. Brazil, China and India all display these underlying trends. All three markets performed poorly in 2011 and de-rated significantly. Both Brazil and China trade at over a 10% discount to GEM (global emerging markets), at 8.2 and 8.3 times forward earnings, respectively. The growth expectation built into these markets is lower than the probable long run growth rate. India is no longer the most expensive market in GEM, or even in Asia. At 13 times earnings, it trades at a discount to its 10 year average of 14.4 times, which we think is an attractive entry point given its high profitability and growth profile. 
Brazil equities recommendation:


Other Latin Markets Comments…
Upgrade Peru, Downgrade Mexico. Remain overweight Latin America.
We increase our weight to Peru given reduced political risk and attractive valuations. We downgrade Mexico given its high valuation relative to other markets in GEM (global emerging markets). Our most favoured countries are China, India and Brazil as well as TIPs (Thailand, Indonesia, Philippines) which are benefiting from a strong underlying consumption and investment cycle. China, India and Brazil also trade at a discount to their historical valuations.
Upgrade Peru. We are upgrading Peru due to an improving risk / reward trade-off. The fears surrounding the economic direction of the new government appear to have subsided, while the fundamental strength in the economy is intact. The corporate sector remains one of the most profitable in GEM. Valuations are very reasonable after the market de-rated this year. It is now trading at 10.5 times 2012E earnings, making it the second cheapest market in Latin America. It is at a discount to its 10 year average of 12.6 times.

Downgrade Mexico. Mexico is now the second most expensive of all emerging markets on a P/E basis, trading on 15 times earnings, a 60% premium to the GEM index and a 80% premium to the Brazilian market. Mexican companies do create value and benefit from a low cost of capital, but we believe the market is now fully valued. Currency is another risk factor, for our forecasts suggest Mexican Peso depreciation through 2012.

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