(Bloomberg) -- Investors are turning more pessimistic on Brazilian equities as fears of political intervention and more government spending add to the lower appetite for risk sparked by the outlook of higher-for-longer rates in the US. 

Banco Santander Brasil, which had one of the most bullish forecasts for Brazilian stocks, slashed its year-end target for the Ibovespa benchmark gauge to 145,000 from 160,000. A monthly Bank of America survey with Latin American equity fund managers showed only 19% of respondents expect the index will finish the year above 140,000 — that’s down from 63% in January.

While the main reasons for the gloom are external — almost 80% of respondents in the BofA survey said higher US rates are the biggest risk for Latin American markets — investors have had plenty to worry about on the domestic front. A less ambitious fiscal target for 2025, the still unclear impact of deadly floods in the south on public spending and the surprise firing of the top executive at oil giant Petrobras by President Luiz Inacio Lula da Silva have rattled markets in the past few weeks.

Read more: Brazil’s Fiscal Woes Ramp Up Pressure on Lula’s Finance Chief

“The removal of Petrobras’ CEO and some other signs of increasing levels of intervention from the Lula administration does not help with investor confidence,” said Christine Phillpotts, portfolio manager for emerging markets value strategy at Ariel Investments in New York. “We do see that as being a headwind that would frankly keep us from adding to our positioning in Brazil.”

After scooping up Brazilian stocks at a breakneck pace at the end of 2023 amid a widespread rally in risk assets, foreign investors pulled money from the local market every month between January and April, according to data compiled by Bloomberg. 

While inflows have modestly picked up in May, the 1.4 billion reais ($272 million) added through Monday compares with more than 34 billion reais ($6.6 billion) of outflows in the first four months of the year. 

The Ibovespa is down almost 6% so far this year, one of the biggest drops among major global benchmarks, according to data compiled by Bloomberg. The index has been hovering around 130,000 points for the better part of 2024, retracing from a record of about 134,000 late last year. 

UBS Global Wealth Management said this week it’s “cautious” on local equities despite depressed valuations. Earnings prospects for Brazilian stocks are among the weakest in emerging markets, Alejo Czerwonko, the chief investment officer for EM Americas at UBS Global Wealth Management, wrote in a note. 

More than half the companies listed on the Ibovespa that reported first-quarter earnings missed estimates, according to data compiled by Bloomberg. By contrast, close to 60% of those listed in Mexico’s benchmark index beat forecasts in that same metric, while the figure stands at almost 80% for companies in the S&P 500 that have reported so far. 

“A quick succession of domestic policy decisions left investors in Brazil under the impression that, with two-and-a-half years still left in his administration, President Lula’s government is accelerating a shift towards more economic interventionism,” Czerwonko wrote. “Ongoing policy noise is pushing investors to require higher risk premia to engage in the asset class.” 

--With assistance from Zijia Song and Renata Silva.

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