HSBC Global Asset Management is predicting further interest rate cuts in Brazil, following the recent 50 basis points reduction, to 11 per cent by the end of the year, signaling the end of the tightening cycle in the Latin American giant and a more positive outlook for equities.

The knock-on effects of its forecast means the firm is predicting the headwinds – including inflation and tightening monetary policy – facing Brazilian equities will subside.

“The recent interest rate cut indicates that the central bank is taking a pro-active approach on monetary policy, and that it may believe the trade off between growth and inflation is at a stage where the latter may no longer be deemed as much of a threat to the Brazilian economy as previously believed,” says HSBC GAM.

The firm also says any deterioration in the global economy will ease inflationary pressure in Brazil, through lower demand for commodities, and that given these factors the 12-month inflation figure would have peaked in August.

Current valuations on the Brazilian Bovespa are on a 12-month forward price-earnings ratio of 8.7, which is close to 2008 levels, says the asset manager.

“The combination of the end of the tightening cycle and further sequential interest rate falls, deeply discounted valuations and potentially returning investor flows has led us to expect there could be a market rebound in the near term, particularly in relation to developed markets,” said Natalia Kerkis, manager of the HSBC GIF Brazil Equity Fund.

In terms of the country’s long-term drivers, GDP is forecast at 3.5 per cent for 2011 and 4 per cent next year, and its trade balance is positive, at $18.4 billion in late August. Domestic consumption is “resilient,” the firm says, with a strong middle-class making up around 50 per cent of the population.

Meanwhile, the Brazilian real has appreciated considerably, but the bank says this is not impacting negatively on the country’s exports, and points out that S&P recently upgraded local currency debt from stable to positive whilst retaining the long-term debt rating at BBB+.

Kerkis cautions that challenges remain, however, in the form of low infrastructure investment relative to countries such as China, India and Russia, and the possibility of negative repercussions from economic woes in Europe and the US.

Brazil previously represented the largest underweight position in the asset manager’s BRIC portfolios, but the team has been increasing exposure to the country recently in light of its positive view.