By Fabio Alves and Alexis Xydias
April 16 (Bloomberg) -- Investors should buy Brazilian stocks and sell Mexican shares because equities in Latin America's biggest economy have become cheaper and its earnings growth prospects have improved, according to UBS AG strategists.
UBS strategists led by Damian Fraser upgraded Brazilian stocks to ``overweight'' today, the first time in five months, and lowered Mexico to ``neutral,'' reversing their previous recommendation made in November.
``Brazil's discount to Mexico has widened this year as the Mexican market has performed better, so Brazilian stocks are attractively cheap over the course of the year, especially the consumer, homebuilding, and banking sectors,'' Damien Fraser, head of equity research at UBS Pactual, the Latin American unit of UBS AG, said in an interview from Mexico City.
UBS's upgrade of Brazil is in contrast to Deutsche Bank AG and Citigroup Inc., which recommended Mexican stocks this month.
The Bovespa index of the most-traded shares in the Sao Paulo stock exchange had lost 2 percent this year through yesterday, compared with a 6.2 percent gain for the Bolsa. Brazilian stocks rose 44 percent in 2007, while Mexican shares gained 12 percent.
The upgrade for Brazil reflects a better outlook for earnings growth in that country over Mexico and the possibility that Brazilian long-term rates may drop, Fraser said.
UBS expects Brazilian companies to post earnings growth of 33.5 percent this year, compared with 15.1 percent in Mexico.
``Because Brazil's economic growth is very robust and commodities prices are still performing pretty well, we see much more significant upgrades in our estimates for Brazil than we see in Mexico,'' Fraser said. ``Mexico is more at risk from negative earnings changes because the economy is weaker than Brazil and many more companies in Mexico have much bigger exposure to the U.S. economy.''
The outlook for long-term rates will be another driver for Brazilian stocks even as the central bank gets set to increase borrowing costs after wrapping up a two-day policy meeting today, Fraser said. UBS economists expect the central bank to raise rates by half a percentage point to 11.75 percent today.
``The increase in interest rates in Brazil has now been discounted and long-term rates, which matters to equities more, are likely to remain stable or come down,'' Fraser said. ``Whereas in Mexico the eventual reduction in rates has been delayed by negative inflation numbers, so the favorable interest rate story that we had in Mexico in the beginning of the year has been played out.''
Deutsche Bank on April 14 cut its 2008 estimate for the Bovespa index by 6.7 percent on concern slowing growth in China may hurt demand for commodities. A week earlier, Citigroup said Mexican stocks will outperform Brazilian shares as interest rates in the two countries diverge and a commodities rally ends in the middle of the year.