Brazil's beef sector will likely become more attractive for investors in coming months, as cattle prices should fall while a weaker local currency favors exports, HSBC Global Research said Tuesday.

In a report, HSBC raised its recommendation on shares of Minerva SA (MRVSY, BEEF3.BR) to overweight from neutral and reiterated its view on BRF Brasil Foods SA (BRFS, BRFS3.BR), saying the latter company's stock "is our preferred play." The banking giant left JBS SA (JBSAY, JBSS3.BR) at neutral and lowered its recommendation on Marfrig Alimentos SA (MRRTY, MRFG3.BR) to underweight from neutral. 

Beef producers in general should benefit from continuing growth in global protein demand of about 2% per year, HSBC said.

"The growth is coming largely from emerging economies, driven by high population growth, rising income levels, urbanization and improving standards of living," analysts Pedro Herrera, Diego Maia and Ravi Jain wrote in the report.

A weaker local currency so far this year, compared with the 2011 average, means that Brazilian companies are particularly well positioned to take dvantage of that growth.

At the same time, domestic cattle prices have stabilized after declining steadily from a late-2010 peak, and HSBC predicts prices this year will hover 4% to 5% below 2011 levels. Meat packers buy live cattle from ranchers, whose record-high calf production in recent years is becoming available for slaughter.

"With softer Brazilian cattle costs and a more favorable currency outlook, Brazilian export profitability should peak in 2012," the bank said. Cattle prices have soared in the U.S., Brazil's main competitor in the global beef market, while export margins have withered.

A relatively high inflation rate in Brazil should make it easier for beef producers to maintain higher prices in the domestic market even as their costs often.

HSBC raised its recommendation on Minerva shares because it is the company most exposed to Brazilian beef, as opposed to rivals that also sell other types of meat or have extensive operations outside South America. The bank raised its 12-month price target for Minerva's local shares to 8 Brazilian reais ($4.38), compared with Monday's closing price of BRL6.60.

BRF, formed from the 2009 merger of Brazilian meat processors Perdigao SA and Sadia SA, has underperformed its rivals so far this year but should benefit from a weaker Brazilian real, HSBC said. The firm is "well-positioned to deliver on its guidance as a result of its very strong balance sheet and solid track record of acquisitions."

For JBS, the world's largest beef producer, a good outlook in Brazil is clouded by the firm's extensive operations in the U.S., where beef margins should be "flat to slightly lower" this year while poultry profitability faces a slow recovery.

"We also still see upside risks from corn as inventory levels are low and supplies tight," HSBC added.

The bank said its recommendation on Marfrig was cut largely on valuation, as the company's shares are up nearly 40% this year amid reports that it could sell off a chunk of its Seara processed-foods division.

While such a deal "could help alleviate Marfrig's leverage," it only increases the risk of dilution for shareholders in a company whose debt with Brazilian state development bank Bndes can be converted to equity in 2015, HSBC warned.