The strategy of betting on the appreciation of bank stocks and commodity-related companies – which yielded substantial returns in the first quarter – is slowly losing steam. As foreigners decrease the volume of their purchases in Brazil in April, local investors report a more uncertain scenario and fewer alternatives for the continuity of the Ibovespa rally, since the macroeconomic fundamentals of the country do not bring much comfort to the allocation in domestic issues.
Higher uncertainties are also reflected in the larger cash position of local funds. According to a survey conducted by Bank of America (BofA) with Latin American asset managers, cash levels remained at 7.7% in April, the highest since records began, in 2018, and well above the survey’s historical average of 4.4%.
The lower confidence of financial agents stems, among other reasons, from the question mark about the growth of the global economy. With the indication of the U.S Federal Reserve that it is expected to speed up tapering, fears have also grown that further monetary tightening could lead the U.S. economy into a recessionary period. At the same time, China’s tough policies to contain the Covid-19 pandemic could also weaken demand in the world’s second-largest economy.
In this sense, the notion that global growth would remain healthy despite the normalization of monetary policy in the United States started to be, if not entirely questioned, at least considered by many global agents. Thus, after a substantial appreciation of the most liquid stocks on the Brazilian stock exchange – both in local currency and in dollars – the foreign flow has shown signs of stabilizing in April.
This month, shares of the mining and steel industries, as well as banks, went south, in contrast to the first three months of the year. Vale ON falls 15,98%, CSN ON drops 15,41% and Usiminas PNA loses 15,03 %. Bradesco PN, Itaú PN and Santander units have declined 5,12%, 6,97% and 6,21%, respectively.
The problem, analysts told Valor, is that the rotation to other sectors of the Brazilian stock market has not convinced financial agents either.
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Ricardo Peretti — Foto: Anna Carolina Negri/Valor
“My opinion is that holding commodity [stocks] is no longer a novelty as it was a few months ago, and the whole market ended up doing it. However, I don’t feel as comfortable migrating to more technology-related stocks or to assets that are more exposed to the domestic scenario. I would still stay from neutral to slightly overweight on commodities,” said Ricardo Peretti, an equity strategist at Santander Corretora.
The view is similar to that of XP’s chief strategist Fernando Ferreira. According to him, the firm still tends, at the moment, to be upbeat with stocks linked to commodities in relation to assets more dependent on the local economy, since the macroeconomic fundamentals are still bad, with weak activity and high inflation. But the conviction about commodities of early 2022 no longer seems to be the same.
“We think it is too early to rotate into growth assets, as the macro environment is still not good and commodity companies continue to generate a lot of cash, with strong dividend yields. The asset prices also remain historically low, which, in theory, is a good entry point indicator, but it can also suggest that the shares may face a correction soon,” he said.
In addition, the strategist said he is concerned about a potential change in the behavior of foreign investors, who “propped up” the local stock market in the first quarter by buying, precisely, stocks linked to commodities and the financial sector, but put negative pressure on the index in April.
“The slowdown in the flow draws attention, and a possible reversal of this movement would be a major concern for the [stock index] Ibovespa, precisely because the local institutional investors are still dealing with redemptions. If international investors start selling their positions in Brazil, who will be the marginal buyer? I don’t think the factors that brought these investors here have changed, but we can see additional pressure,” he said.
Jorge Oliveira, an equities manager at BlueLine Asset Management, also ponders that the local market may be experiencing a turning point, assuming that foreign investments, focused mainly on commodities and the financial industry, have no longer shown the same strength as before.
“With Petrobras stocks slowly gaining ground and China’s slowdown affecting metal commodities, the narrative that had Brazil as a destination for international investors has been put to the test. Valuations are cheap, but the Chinese government is still propping up the economy there. In case the stimulus expected by the market does not come, there may still be a downward revision of companies’ profits, making them not seem so cheap anymore,” he said.
Along these lines, between February and March this year, the asset manager considerably reduced its positions in stocks in its Blue Alpha B hedge fund, privileging exchange and interest rate products.
There are, on the other hand, those who still feel more comfortable with commodity-linked assets. Victor Nehmi, manager of Sparta’s commodities fund, points out that when commodity prices move uniformly, it is a sign that macroeconomic imbalances are occurring.
“We see no signs that prices have peaked and that they will start to fall from here on out. There is no prospect of an increase in the supply of the main commodities and this gives us conviction that prices are likely to remain high at least until next year,” he said.
According to him, the high prices of commodities are likely to still be reflected in the corporate results of companies over the next 12 months. Mr. Nehmi’s only caveat that the recent appreciation of the real reduces exporters’ margins.
Lucas Brunetti, a commodities analyst at Garde Asset, also sees the worsening of the industry as unlikely. He is upbeat about the fact that China has seen such a flagrant slowdown in the economy, since this is expected to stimulate more forceful government action.
“The Chinese government was restricting credit, now it is expanding it. Also, with the lockdown, services naturally fall. And if the third sector is not advancing, the state apparatus, which seeks to deliver a GDP growth close to the 5.5% estimated for 2022, will need to invest in infrastructure,” he said.
Source: Valor International