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Merrill Lynch has encountered an unprecedented level of pessimism regarding Brazil, the investment bank said in a report, following meetings with equity investors in London, continental Europe and the east coast of the US in the last couple of weeks.
Concerns over low growth and high inflation in the region's largest economy, combined with excessive regulation and increasing level of state intervention in a range of industries appear to be taking their toll.
According to Merrill Lynch, investors mentioned stagflation, a broken model and lack of visibility on regulatory developments as well as pessimism on the outlook.
The broker noted that this was in sharp contrast to the optimism displayed by investors with regards to Mexico, and that very few questions on security issues in Mexico were raised.
"While we share the market concerns on inflation in Brazil, and we agree that the medium-term outlook seems better for Mexico than for Brazil, we stand by [our] forecast for a 3.6% growth rate in 2013, well above the 3.1% consensus forecast," said Merrill Lynch analyst Marcos Buscaglia.
Merrill Lynch estimates the potential GDP growth for Brazil to be around 3% and does not expect a third year of growth below that level at a time when both monetary and fiscal policy remain in an expansionary phase.
In addition, the broker expects continued support from commodity prices, a pick-up in Chinese growth and an expansion in domestic agricultural production to ensure that growth surpasses 3% in 2013 despite the level of skepticism it has encountered.