Bets on key interest rate at 14% gain ground

Most agents expect 50-basis-point hike this week

08/01/2022

Central Bank's headquarters in Brasília — Foto: Jorge William/Agência O Globo

Central Bank’s headquarters in Brasília — Foto: Jorge William/Agência O Globo

The current monetary tightening cycle, now entering its 18th month, may be nearing its end. After a 1,125-basis-points hike in the key interest rate Selic and Central Bank’s messages that the magnitude of the tightening matters, most of market participants believes that the Monetary Policy Committee (Copom) will deliver one final 50-basis-points hike this week, to 13.75% a year. This view, however, is far from being consensual and, with the strong deterioration in medium-term inflation expectations, a relevant portion of the agents expects the rate to reach at least 14% this year.

A survey carried out by Valor between July 27 and 29 shows that medium-term inflation expectations continued to rise. The average point of the 110 estimates collected for the IPCA (Brazil’s official inflation index) in 2023 was 5.4%, well above the top of next year’s inflation target range (4.75%). In addition, agents are already concerned about the de-anchoring of expectations at longer horizons. The median of 86 projections points to an IPCA of 3.5% at the end of 2024, compared with the center of the target of 3%.

In this environment, which includes an already advanced stage of the tightening cycle and still very negative conditions for current and prospective inflation, there is a clear division among market participants regarding the next steps of monetary policy. It is worth pointing out that in this week’s decision, the relevant horizon for the Copom’s actions is expected to include the calendar year 2023 and, to a lesser extent, 2024.

Thus, even though the expectation of a 50 bp increase in the Selic this week is virtually consensual, the perspective for the rate at the end of the year still causes a significant division among market economists. Valor’s survey shows that 65 analysts expect the key interest rate to reach 13.75% this week and to remain at this level; 32 see the Selic at 14% in December; and 17 project a rate of 14.25% at the end of the year.

“Although there is indeed some possibility that the Copom will choose to interrupt its monetary tightening cycle, especially given the significant extension and intensity [of hikes], we do not believe this will happen in August,” says José Maurício Pimentel, the chief economist at BB Asset. The prospective inflationary picture and the risks around expectations are not yet “safe enough” for the Central Bank to end or even pause the cycle, he says.

“The level of current inflation and its core and diffusion indexes have not yet eased substantially. The recent drop in commodity prices in the international market may help but they could rise again in view of potential new supply problems,” Mr. Pimentel says. BB Asset expects the cycle to end only in September, with the Selic at 14.25%.

By simulating Central Bank’s inflation models, Anna Reis, chief economist and partner at Gap Asset, estimates that the monetary authority’s new projection for inflation at the end of 2023 is expected to rise to nearly 4.3%, compared with 4% in June’s decision, thanks especially to the adjustment of some taxes foreseen for 2023. As a result, the Central Bank’s inflation estimate would move even further away from “around the target” – a strategy the Copom revealed in its last decision that it has been pursuing. In Mr. Reis’s view, this would justify a new adjustment in interest rates in September.

“Reproducing the mechanics it [the Central Bank] has been using, we still think that the conclusion will be that some additional tightening will be necessary. Given the already very high level of the Selic rate, it may signal a new, smaller increase or even leave the door completely open, in the sense of not increasing it further,” he says. Besides the 50 bp increase this week, the economist works with a final 25 bp increase in September, when he sees the Copom ending the tightening cycle.

Although he expects a residual adjustment in September, Mr. Reis believes that the level of interest rates in the Brazilian economy is already quite contractionary, with a real ex-ante rate around 8.3%, a level similar to that of the 2015 monetary tightening cycle.

In addition, the economist believes that the 2023 inflation projections are contaminated by the shocks affecting current inflation. “It’s three consecutive years of expressive shocks that have taken Brazilian and global inflation to high levels, and economists tend to extrapolate the scenario forward. We believe that the risk of inflation in 2023 is greater to be down than up,” he says. Gap projects the IPCA at 5% in 2023 and at 3% in 2024.

Gustavo Arruda, the head of research for Latin America at BNP Paribas, says that the role of the Central Bank, at this moment, is to contain the problem. “The de-anchoring of expectations has happened and we are seeing higher numbers, above 5%. The de-anchoring of expectations is increasing, not decreasing. If I don’t know what is going to happen with the inflationary scenario, one has to work with the balance of risks. And, within this environment, I would rather have the risk of doing more than less, even though it is more costly in terms of activity,” Mr. Arruda says.

BNP Paribas was one of the first banks to point to a scenario of a Selic rate around 14% – and it is still the bank’s baseline scenario. “I can’t see the Central Bank stopping at this point. We know that inflation in the short term will fall for reasons unrelated to monetary policy, but next year’s expectations are rising, as are those for 2024,” he says.

“And, as for the news, we know that there will be more public spending, which is likely to boost demand at the margin. The Central Bank expected that monetary policy would start to decelerate growth starting in the third quarter, but a considerable part will be counterbalanced by fiscal policy,” Mr. Arruda says. In his view, if the Central Bank ends the cycle at this point, it risks facing even higher expectations ahead.

Anxiety surrounding the Copom’s communication regarding the next steps in monetary policy has increased since the committee is used to indicating what it foresees for its next decision. With the cycle nearing its end, the market must therefore remain very attentive to the signals from the policymakers to calibrate bets regarding the end of the cycle.

Economists at Itaú Unibanco expect the Copom to signal that the most probable scenario is the end of the cycle, but leaving the door open for a possible final hike in key interest rates in September should the inflationary scenario deteriorate further. “Additionally, we believe that the monetary authority is likely to determine that an eventual additional adjustment would be implemented at a slower pace (25 basis points),” say the economists at Itaú, which projects the Selic at 13.75% per year at the end of the cycle.

The chief economist for Brazil at HSBC, Ana Madeira, believes that the Copom is likely to try and give “as little information as possible” and present few changes in relation to the announcement of June’s decision, by maintaining a tone more dependent on the evolution of indicators. “I also expect the Central Bank to leave itself some room to reduce the pace in the next meeting,” she says.

According to the economist, the recent deterioration in inflation expectations is expected to force the Copom to deliver another residual 25 bp hike in September. She believes that only next month will the slowdown in economic activity start to show clearer signs and open space for the monetary authority to put an end to the tightening cycle.

Ms. Madeira also estimates that the continued normalization of supply shocks next year and a synchronized slowdown in the global economy are likely to cause faster disinflation in the economy – HSBC has a projection of 4% for the IPCA in 2023. “In April, the IPCA is expected to already be around 6%. This will mean that we will start to see inflation slowing down, and this will leave room for the Central Bank to start the cycle of interest rate cuts,” says the economist, who estimates the Selic at 9.75% per year in 2023.

On Friday, the yield curve was pricing a Selic around 14% per year by the end of the year and between 12.25% and 12.5% in 2023. The Copom options market, on the B3, pointed to an 88% probability of a 50 bp hike in the Selic this week against an 11% chance of a 25 bp hike. In relation to the Copom’s September meeting, the market pointed to a 35% chance of stability, a 40% chance of a 25 bp hike and a 21% chance of a 50 bp increase.

Garde Asset’s baseline scenario includes 50 bp hikes in August and September, to 14.25%. “We believe that the Central Bank will take into account the additional de-anchoring of expectations. It is concerned about that and will have to react to that,” says Garde’s chief economist Daniel Weeks.

“The focus is going to be on how the Copom will signal the next steps. And, given the deterioration of the prospective inflation scenario between meetings and the fiscal deterioration, both due to the higher risk and the increase in disposable income, it is very difficult for the Copom to close the door and say that it will stop raising interest rates,” he says. In Mr. Weeks’s view, the Central Bank will leave the door open to raise the Selic rate by the same magnitude – 50 bp – or at a slower pace in September.

*By Gabriel Roca, Victor Rezende — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Órigo has R$1.5bn to expand solar power generation

R$460m investment comes on top of previous R$1bn injection

08/01/2022

Surya Mendonça — Foto: Silvia Zamboni/Valor

Surya Mendonça — Foto: Silvia Zamboni/Valor

Órigo Energia received an investment of R$460 million from the U.S. fund manager Augment Infrastructure with the objective of boosting distributed generation. The amount comes on top of another R$1 billion injection to reach an installed capacity of more than 250 megawatt peak by the end of 2022.

Augment became a major shareholder in the company, along with TPG ART, MOV Investimentos and Mitsui. The company does not reveal the share of the new partner but says that the U.S. fund will not take control of the company.

With this injection and debt raising, the company reaches R$2 billion of investments until the end of 2023 with 500 MWp. By 2024, with new funding planned, the goal is to reach R$4 billion invested and 1 GWp of installed capacity.

Órigo CEO Surya Mendonça knows that it won’t be easy, since the current backdrop of high interest rates makes it difficult to raise funds and the solar industry faces deep problems in its production chains, which have made the capital expenditure of the projects increasingly variable.

“This capital injection gives Órigo more autonomy to accelerate the construction of solar farms, continue investing in technology, and expand the service to new geographies,” says Mr. Mendonça.

He explains that the entry into force of Law 14,300/22, which establishes the legal framework for power self-generation, microgeneration, and distributed minigeneration, brought more security for new investors to invest in Brazil.

“This is a consequence of the attractiveness and predictability that the renewable sector has with the new distributed generation laws that were approved last year. So we see that in Brazil it is possible to attract foreign capital with good projects, a team, and growth plans,” he says.

The executive says that the company serves more than 50,000 customers with a current installed capacity of operational 150 MWp distributed in 40 small solar farms in Minas Gerais, Pernambuco, and São Paulo. The company wants to reach 500,000 customers in the Southeast, Central-West, and Northeast regions.

The strategy is well known and has been working well among companies focused on distributed generation, which means building small plants of up to 5 MWp, disposing of the energy on the grid, and selling quotas of the solar generation to customers. The idea is to direct 90% of the value to increase capacity. The remainder is spent on attracting customers.

In fact, this business model is what attracted the Investment Fund for Developing Countries (IFU), a Danish fund for developing countries that invests in Órigo through Augment. “IFU has made several investments in renewable energy in Brazil, and the investment in Órigo Energia represents our commitment to support the green transition in the country. Órigo has an innovative business model for the development of distributed solar generation sector in Brazil,” says IFU’s CEO Torben Huss.

*By Robson Rodrigues — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Nutrien foresees jump in sales in Brazil

Acquisition, organic growth boost company, whose sales totaled R$3bn in 2021 and may now reach R$8bn

07/29/2022

André Dias — Foto: Silvia Zamboni/Valor

André Dias — Foto: Silvia Zamboni/Valor

Nutrien’s acquisition of the fertilizer distribution network Casa do Adubo will boost the Canadian company’s growth in Brazil. The deal was announced last week and still depends on the antitrust regulator CADE’s greenlight.

The company’s turnover in the country is expected to reach R$8 billion in 2022, compared with R$3 billion last year, says André Dias, Nutrien’s CEO in Latin America. The results will be driven by Casa do Adubo’s sales – expected to reach R$2.5 billion – and organic growth.

Besides the sales that will come from Casa do Adubo’s 39 points of sale in 11 states (Acre, Bahia, Espírito Santo, Maranhão, Mato Grosso, Minas Gerais, Pará, Rio de Janeiro, Rondônia, São Paulo, and Tocantins), the projected value includes the revenue from Marca Agro Mercantil, a Minas Gerais-based chain with seven stores whose acquisition, unveiled at the end of June, also depends on CADE’s approval.

“With the acquisitions, we will have 120 stores and experience centers in Brazil, with a much greater geographic diversification. Our network is in São Paulo, Minas Gerais, Goiás, Tocantins and Mato Grosso do Sul now. With Casa do Adubo, we will reach 13 states,” says Mr. Dias. The value of recent purchases made by Nutrien was not disclosed, but sources in the segment estimate that they have exceeded $2 billion.

Besides the greater amplitude, Casa do Adubo, in particular, brings to the Canadian multinational 100,000 new smaller clients, with properties between 50 and 200 hectares. Currently, the farms of the company’s 7,000 customers are generally between 200 and 2,500 hectares.

“Furthermore, we will have more access to the market of redistribution of agricultural inputs, since Casa do Adubo maintains this channel with smaller networks,” says Mr. Dias. According to him, after seven acquisitions in two years, it is time for Nutrien to focus on the integration of networks to generate greater efficiency in operations. “But we are always looking at the market,” he said amid the Farmer’s Day events held by the company this week, which is celebrated on July 28.

In addition to its growing chain of input distributors, Nutrien – the largest supplier of potassium-based fertilizers in the world, with mines in Canada – also has four fertilizer blending plants in Brazil and plans to open three more.

*By Fernando Lopes — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Unifi to expand capacity in yarn plant by 50%

U.S.-based company has included Brazil in list of operations to receive slice of $100m this year

07/29/2022

Eddie Ingle — Foto: Carol Carquejeiro/Valor

Eddie Ingle — Foto: Carol Carquejeiro/Valor

Unifi, a U.S.-based polyester textured yarn maker, has included Brazil in the list of operations to receive a slice of $100 million this year. With a plant in Alfenas, Minas Gerais, the company expects to expand by up to 50% the capacity of the Brazilian operation and increase local production of yarns made entirely from used plastic bottles. Part of the funds will be set aside for the United States and El Salvador.

“We have not disclosed exactly how much of the investment is coming to Brazil, but the money we are spending is quite expressive to expand business here by 40% to 50%,” CEO Eddie Ingle told Valor. Here, the manufacturer sells especially yarns that supply the clothing, automotive and furniture markets.

Such optimism about Brazil, he says, lies in the country’s fast economic recovery. According to the executive, the first impact of the pandemic was a sharp drop in revenue. “Our business in that period, between April and June, fell 50% around the world. In Brazil, it fell 70%. It was very dramatic. But Brazil seems to recover much faster than the rest of the world,” the executive said.

In the nine months through March, Unifi’s Brazilian operation reported $91 million in sales, up 25.3% year-over-year. The company’s fiscal year 2022 ended in June, but the data have not been released yet. Globally, sales revenue grew 24% to $598 million.

This recovery is mainly due to the change in the global supply chain scenario, says Mauro Barreira Fernandes Jr., who is taking over as Unifi’s chief executive for Brazil. He will replace Lucas Rocha, who is retiring. “The industry was very dependent on imported yarns,” Mr. Fernandes Jr. says.

Social distancing measures slowed sales of clothing, but boosted items for home, such as mattresses, sofas, and chairs. This helped to keep up demand. Now, the recovery of clothing and footwear sales is driving orders.

“As we produce here and have a large stock, we are able to supply the industry, which has replaced imports,” the Brazilian executive said, adding that the company’s market share increased to 17% from 11%. In Brazil, there are few companies that compete directly with Unifi, such as the Spanish company Antex. The main competition comes from imported products, according to the company.

Another issue, he points out, is that foreign brands, especially in the apparel industry, are producing locally, with outsourced manufacturers. Nike, Adidas, Reebok, and Puma are among these companies. The growing production of the Brazilian apparel industry is driving the business of yarn manufacturers in the country, he says.

According to data from the Brazilian association of artificial and synthetic fiber producers (Abrafas), the country ended 2021 with an installed capacity to produce 239,300 tonnes of polyester, including 108,900 tonnes of textile filament. The production totaled 83,400 tonnes, with more than 82,000 tonnes sold in the domestic market. However, 279,000 tonnes are still imported to meet a consumption of nearly 360,000 tonnes of polyester textile filament. In 2019, the year before the pandemic, 259,000 tonnes were imported, while 75,000 tonnes were produced and 70,000 tonnes were sold by domestic manufacturers in the domestic market. Consumption was also lower: 332,600 tonnes.

The sales growth, however, was also followed by higher costs. In Brazil, despite the higher revenue, the profit was virtually stable in relation to the previous year, totaling $24.5 million. The sales costs grew 37%.

According to Mr. Ingle, in the case of Brazil, part of the recovery already seen in Unifi’s business is due to investments in new equipment. Six new machines are already in operation.

The updating of the machinery will allow the company to have more energy efficiency and produce a greater variety of yarns. “It is also faster equipment. We can process the yarn at a much higher speed than with the existing equipment.” The money will also be used to expand storage capacity and for physical expansion.

One of the company’s main objectives is to increase local production of Repreve, a yarn developed by Unifi and made entirely from post- and pre-consumer PET (polyethylene terephthalate) plastic. The product was launched in 2007 and already accounts for 37% of Unifi’s global sales, although it is still far from a double-digit level share in Brazilian revenues. Since its launch, 33 billion bottles have been transformed into synthetic fibers, Unifi says. These yarns are used in clothing, furniture, car seats, and shoes. The goal is to transform 50 billion bottles by 2025.

*By Raquel Brandão — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Nissan launches car subscription in Brazil

Entire line of the Japanese brand will be available in 12, 18, 24 or 36-month plans

07/29/2022

Nissan Move includes a new and connected car including vehicular tax IPVA, insurance, maintenance and 24-hour assistance — Foto: Divulgação

Nissan Move includes a new and connected car including vehicular tax IPVA, insurance, maintenance and 24-hour assistance — Foto: Divulgação

Nissan launched Thursday a subscription car service in Brazil. The entire line of the Japanese brand will be available in 12, 18, 24, or 36-month plans, with kilometers traveled ranging from 1,000 to 2,000 kilometers per month.

Called Nissan Move, the service includes a new and connected car including vehicular tax IPVA, insurance, maintenance and 24-hour assistance. During the launching stage, the service, which can be purchased at a dealership or online, will be available São Paulo, Rio de Janeiro, Curitiba, Porto Alegre, Joinville, Goiânia, Vitória, Macaé, and Salvador.

According to the company, to rent a Nissan Versa Sense CVT for 24 months with up to 1,000 kilometers driven per month, for example, the installments will be R$2,409 per month. On the other hand, a Kicks Advance, also with CVT transmission, will cost R$2,889 per month for 36 months of contract and also 1,000 kilometers driven per month.

Today, subscription services represent 8% of the rental market in Brazil. According to Humberto Gomez, Nissan’s marketing director for Brazil, it is hard to predict how much this market can expand. He estimates that the share within the rental market can reach 15% in nearly three years. Outsourced services in rental company fleets absorb 52% of this market. Rental by ride-hailing drivers has a 20% share.

“With production returning to normal due to the resumption of semiconductor deliveries, it will be easier to see how this market evolves,” Mr. Gomez said during the presentation of the new service.

According to the CEO of Nissan in Brazil, Airton Cousseau, the automaker’s subscription car service had been ready for a long time. But the launch was delayed because “there would be no way to meet the demand” due to the lack of components throughout the industry.

Automakers and rental companies have been betting on subscription car services in an attempt to draw a new public. The proposal meets especially people who do not want to worry about the expenses that owning a vehicle imposes.

But the industry estimates that there is demand from other groups of customers, such as those who want to test a model before buying it. The idea also tends to attract those who want to have a new car every year or two without having to invest in the purchase, or even those who want to drive around for a while in a more luxurious car than they could afford, or test how an electric car works.

*By Marli Olmos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Food delivery boosts use of plastic packaging in Brazil

Plastic consumption in the sector jumps 46% from 2019 to 2021, study shows

07/27/2022

The Covid-19 pandemic has caused the consumption of take-out food to skyrocket – and with it, that of plastics for packaging, in addition to straws, cups, plates, and cutlery. Plastic consumption in the delivery sector jumped 46% from 2019 to 2021. It means a rise to 25,000 tonnes from 17,000 tonnes of single-use plastic products: 68 tonnes per day and 2.8 tonnes per hour.

In 2018, Brazilian households spent R$508 billion on food. Take-out food accounted for R$12.3 billion, or 2.4% of the market. The data is part of a study by Oceana, the largest NGO focused exclusively on protecting the oceans.

The study seeks to map how the change in consumption habits caused by the pandemic affected plastic pollution in Brazil. It was prepared by consultancy ExAnte economists with data from the statistics agency IBGE.

The study also recalls that research done in 2017 and published in the scientific journal Science Advances revealed that in less than two years, almost 100% of the short-lived plastic packaging produced worldwide has already been consumed and discarded. They do not degrade, they last hundreds of years.

Plastic particles have been found in the placenta of pregnant women. In March, researchers at Vrije University in Amsterdam found, for the first time, the presence of microplastics in the bloodstream.

Plastic is responsible for at least 70% of the waste found on the Brazilian coast. It threatens turtles, whales, dolphins, and more than 800 species. It has been found in the stomachs of polar bears and even elephants.

The #DeLivreDePlastico campaign was launched during the pandemic, in December 2020, by Oceana and the United Nations Environment Programme (UNEP). The idea was to require delivery app companies to commit to reducing plastics for packaging products, replacing them with reusable or proven biodegradable options.

Lara Iwanicki — Foto: Wenderson Araujo/Valor

Lara Iwanicki — Foto: Wenderson Araujo/Valor

“These companies are central in the chain that links what is produced by the plastic industry to the food sector and, as a result, with the problem of pollution,” says environmental engineer Lara Iwanicki, Oceana’s campaign manager.

The intention is for food delivery apps to commit, among other actions, to encourage partner restaurants in the country to deliver food free from single-use plastic. “In a second phase, we want them to present plastic reduction targets. With so much profit, and benefiting from this scenario, it is unacceptable that these companies do so little in return,” she says.

A year ago, iFood offered customers using the app the option to waive the delivery of cutlery, cups, straws, and other plastic items by restaurants. More than 40% of the restaurants in the company’s base offer this option today, out of a total of 200,000 restaurants in the country. The goal is to have 100,000 restaurants integrated into the effort, says environmental engineer André Borges, head of sustainability at the company, the leader in the Brazilian market.

The result was that 94% of consumers replied that they prefer not to receive cutlery and straws. The impact of the action was more than 200 million orders dispensing single-use plastics since July 2021. The average number of orders is about 60 million per month.

That is, 25% of the customers place their orders and do not want the plastics. “We know that there is a pandemic effect and that the percentage will decrease, but it is a good start,” says Mr. Borges. In the company’s accounts, the reduction would be 510 tonnes less of plastics.

IFood’s plan also has two pillars, in addition to reducing consumption. The second is the replacement of plastic packaging for other materials, such as paper, corn straw, and even manioc-based material. “The problem is that they can be up to ten times more expensive than the others,” says Mr. Borges. The last pillar is recycling. “We hope that other players will join this effort,” he says.

Oceana was founded in 2001 and has been in Brazil since 2014. It operates in 11 countries and the European Union, seeking to protect biodiversity.

*By Daniela Chiaretti — São Paulo

Source: Valoar International

https://valorinternational.globo.com/
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Inflation slows down helped by fuel tax relief

After tax relief, mid-month inflation index IPCA-15 lost steam in July

27/07/2022

Recent tax cuts on key items helped to bring, as expected, relief to the July inflation preview, which also saw a cooling in industrial goods prices. Inflation of services and more inertial items, however, remains pressured and worries economists.

The increase in Brazil’s mid-month inflation index IPCA-15, known as a reliable predictor for official inflation, slowed down to 0.13% in July from 0.69% in June, below the median of expectations compiled by Valor Data, of 0.16%. It was the lowest monthly variation since June 2020, when the indicator oscillated only 0.02%. In 12 months, the IPCA-15 went to 11.39% in July from 12.04% in June – compared with the top of the target range of 5%. The diffusion – proportion of items with price increases in the period – also fell, to 67.8% from 68.9%, according to Valor Data.

Most of the July IPCA-15 slowdown was explained by the 1.5% drop in regulated prices, after a 0.86% rise in June, MCM Consultores says. This reflects tax cuts on fuels, which went down 4.88%, and electricity, whose prices fell 4.61% – even more than economists expected. Among the fuels, gasoline dropped 5.01%, and ethanol, 8.16%. Diesel oil, on the other hand, rose 7.32%.

Together, fuel and electricity had a negative impact of 0.58 percentage points on the IPCA-15 in July, which means that, without this, the index would have been 0.71%. The tax cut on telecommunications has not yet been captured by the indicator and is expected to show in next readings, according to analysts. According to market projections, IPCA may fall 0.50% to 0.75% in July.

Non-regulated prices inflation, in turn, accelerated to 0.72% in July from 0.63% in June. The food and beverage group rose to 1.16% from 0.25%, with advances for both food at home (to 1.12% from 0.08%). The price of long-life milk rose 22.27% in July and was the main influence on the IPCA-15 for the month.

Although food inflation remained strong in the July forecast, economists note that the acceleration was slightly less sharp than projected and the group may have a less unfavorable outlook ahead with the cooling in commodity prices, especially grains.

Some relief in commodities — notably metals — may also help explain the deceleration in industrial goods prices, to 0.28% in July from 0.65% in June, with some reduction in the rate over 12 months (to 13.5% from 14%). “It’s still relatively timid, but it’s a sign we’ve been waiting for,” says Daniel Karp, an economist at Santander. The category also benefited from tax cuts on ethanol, but there were surprises in other more relevant industrial goods items, such as automobiles, he points out. New car inflation, for example, decelerated to 0.14% in July from 1.46% in June.

Roberto Secemski — Foto: Ana Paula Paiva/Valor

Roberto Secemski — Foto: Ana Paula Paiva/Valor

Industrial goods are also included in the core measures, those that try to minimize the effect of more volatile items. In the average of the five main cores, inflation went to 0.72% in July from 0.89% in June. In 12 months, however, it still accelerates to 10.56% from 10.43%, the highest level since 2003, says Roberto Secemski, chief economist for Brazil at Barclays. He expects a rapid deceleration of the IPCA in the second half of 2022, but not of the cores, which could complicate the Central Bank’s outlook for the interest rate, he says. “Core inflation dynamics are less susceptible to these tax changes,” he says.

Costs for more inertial and labor-intensive services also remain elevated. Inflation in the sector remained around 0.85% in July, while underlying services (more linked to the business cycle) went to 0.91% in July from 0.86%.

“These items will only react with the lag of monetary policy. It shouldn’t mean a relief in the short term, it will start to show towards the end of the year,” says Andrea Damico, the chief economist at Armor Capital. Despite the “very ugly” services inflation, the relative relief in industrial goods may make the Central Bank more comfortable to pause the cycle after the expected hike in the key interest rate Selic in August, Ms. Damico says.

*By Anaïs Fernandes, Lucianne Carneiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Investor asks for more to finance retailers’ debt

High interest rates, resistant inflation hurt companies whose sales depend on credit

27/07/2022

Much higher interest rates, resistant inflation and reduced consumption power make up the scenario that has punished retail companies in the stock market for some months. But, more recently, the warning sound has also started to blare in the local corporate debt market, where a good number of these companies have been financing themselves, either to continue their expansion plans, or to reinforce their cash flow, thinking of going through the turbulence that may still come given the macroeconomic risks that lie ahead.

Analysts heard by Valor are unanimous in saying that, unlike what one might think when looking at large retailers traded on the stock market – Magazine Luiza, Americanas C&A, Centauro, Guararapes, Renner and Via –, which have seen losses of up to 88% in 12 months, the situation in the credit market is not dramatic. Most companies have a leverage situation under control and can access the market.

The point is that investors are becoming more demanding, not willing to pay any price, and not even willing to finance companies for any length of time. And at a time when the supply of securities is abundant, you can choose who you want to give money to. And this is already reflected both in the trading of shares in the secondary market and in new issuances.

“What we see is a dispersion of performance among companies, typical of times when uncertainty about the sector as a whole grows,” says Alexandre Muller, a partner at the asset management company JGP.

Two recent operations by large retailers illustrate this environment well. Americanas raised R$2 billion in June issuing 11-year bonds. The rate paid was 2.75% above the CDI (the interbank short-term rate), in an operation considered very successful, even with such a long term. Similarly, Centauro raised R$500 million by issuing 5-year bonds, paying 2.1% above the CDI, in a placement that was fully absorbed by the market.

In July, Via concluded the issuance of R$400 million in five-year and seven-year Certificate of Real Estate Receivables (CRI). But given the low demand for the security, of only R$134 million, the banks that coordinated the offering had to keep a portion of R$266 million.

In this case, the assessment of the managers is that the term was too long given the risk of the company, which deals with macroeconomic issues but also operational and governance issues. It is enough to remember that during the book-building process, a disagreement between the partners about the company’s compensation plan became public.

Similarly, C&A tapped the market to raise R$600 million through bond issuance in April. At the time, Fitch had changed the company’s rating outlook to negative. The banks also had to exercise the firm commitment and were left with 69% and 28.65% of the two lots, maturing in 2025 and 2028, respectively.

When one looks at the secondary market, there are also some movements drawing attention. Magalu’s bond, which was issued last year at a rate of 1.25% above the CDI, for example, is now traded at 1.75%. In contrast, Guararapes’s bond maturing in 2024, which was issued with a spread of 2.95% above the CDI, had a reference rate of 2.0295%.

“There is a change in conditions for these companies, and the credit world also perceives this,” says Mr. Muller. He notes that, although the negative effect is not as intense as the one seen in 2020, when the pandemic strongly impacted some sectors, such as restaurants or tourism, investors now seem even more cautious.

“In 2020, it was easier to have a projection for the companies’ recovery because we knew things would normalize. Now, the call is more complex, because nobody knows when the interest rate will stop rising and not even for how long it will remain high,” he explains. In this context, says Mr. Muller, the fiscal scenario has an even greater weight on the market, once the definition of the fiscal framework for the next government will have a great influence on the interest rate projections.

Vivian Lee — Foto: Carol Carquejeiro/Valor

Vivian Lee — Foto: Carol Carquejeiro/Valor

Vivian Lee, a partner at Ibiúna Investimentos, says that the macroeconomic scenario of high interest rates and inflation affects income and cools consumption. And this has a direct impact on the companies’ revenues and especially punishes those who have a financial arm. Not to mention the immediate effect of the rise in the Selic policy interest rate on the debt, which, for the most part, is pegged to the CDI. “We haven’t seen any impact of the financial cost on the earning reports when looking at the 12-month horizon yet, but in the second half of the year this will start to appear,” she says.

What analysts observe, however, is that the impact of interest rates will have a different magnitude in each retail segment. The most sensitive is the white goods segment – represented by Via and Magalu – which has already benefited a lot during the pandemic, a period in which consumers directed their funds to this type of product.

On the other hand, fashion retail ends up gaining space at this moment. But for those who have a financial arm, the rise in interest rates has a double negative effect: on consumption and on portfolio default. This is the case with C&A, Renner, and Guararapes (owner of Riachuelo).

The need for working capital, the profile of the consumer public, and the level of leverage are also variables that are being closely observed by investors.

“Those who depend on the upper classes end up benefiting. Those who work more with the lower classes will lose more because inflation weighs more for these consumers,” says Luiz Sedrani, BV Asset’s chief investment officer. “The government’s [consumption stimulus] package tends to stimulate the economy, but we have to keep an eye on default rates.”

The market has observed since March a repricing of the shares, a movement that has not yet reached all the companies, says Ms. Lee, with Ibiúna. “How much this scenario will be reflected in the fees paid by the companies is hard to say, but it is clear that there will be a price correction, and this time it will be due to credit risk,” she says. This environment is likely to overlap the flow of investments, which remains strong for the corporate debt market. This has contributed to balancing the rates paid by companies. “Even if you have an appetite for corporate debt, investors will separate the wheat from the chaff, and at some point, prices will adjust.”

Leonardo Ono, Legacy’s corporate debt manager, says that many retailers are impacted because of factoring of receivables, an operation whose cost increased with the higher Selic. But, for him, this is not an exclusive situation for retail, but for companies that depend on the local economy. A good part of these companies are prepared to go through turbulent periods. “I don’t see an explosive situation,” he says.

In a note, Magalu said it ended the first quarter with an adjusted net cash flow of R$1.6 billion and a total cash flow of R$8.5 billion, considering cash and financial investments of R$2 billion and available credit card receivables of R$6.5 billion. Guararapes, Americanas, Renner and C&A declined to comment. Centauro and Via declined to comment, citing a quiet period before the release of their earnings reports.

*By Lucinda Pinto — São Paulo

Souarce: Valor International

https://valorinternational.globo.com/
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Stock analysts revise price targets amid high inflation, interest rates

They are having to work twice as hard to keep models up to date

27/07/2022

These are tough times for everyone, especially for those who make a living out of foreseeing the future. Investment analysts, who specialize in predicting how much a stock will cost and recommending or not its purchase, are having to work twice as hard to keep their models up to date in a game that is key for them to move before the market does.

In recent months, dramatic changes in the global economic environment, with all-time high levels of inflation and interest rates, have forced analysts to revise their projections for stocks. Last week, the European Central Bank adjusted rates for the first time since 2011, for instance. Here in Brazil, a survey carried out by Valor shows that in some industries more sensitive to price increases, there has been an 80% reduction in the target prices of companies covered by banks and asset management companies over the last three months.

As reports to clients show, analysts are rushing to update “macroeconomic assumptions” –inflation, interest rates, and higher cost of capital – which invariably changes the central mechanism in calculating a company’s value: the discount rate.

To determine the “fair price” of a company, typically for a 12-month term, analysts project its cash flow for the next few years and then bring it to present value using a discount rate, which tries to balance the expected return with the risks involved.

“The discount rate is the more artistic side of company analysis and asset management,” writes asset manager Alexandre Póvoa in the book “Valuation — Como precificar ações” (“Valuation – How to price stocks”). It is an art that involves “variables that interact with each other,” for which there is no “scientifically correct answer.”

The performance of companies – one of the most important variables – seems to resist well the macroeconomic instability, which is a great unknown at the moment. One example is the constant adjustments economists are making in their GDP growth projections: they went to 2% in the most recent round of revisions from zero at the beginning of the year. The very polarized election in October is not much of a help as analysts struggle to find fair prices compared with current prices.

Recent signs of cooling inflation in Brazil, which came in the mid-month inflation index IPCA-15 data released Tuesday, may force a fine adjustment upwards – the index is known as a reliable predictor for official inflation. If the global outlook worsens even more, another round of target price cuts may come, but this time because of another variable, which is profit growth potential.

This is because regardless of companies having “their homework done,” as analysts like to say, it is very difficult for them to have a surprising growth when everything is going badly abroad.

The survey conducted by Valor with reports from 16 banks and asset management companies that cover several industries shows that the three basic categories of recommendations – buy, sell and hold – have changed little since the beginning of the year, with a strong preponderance of buys. According to the analysis, 72% of 634 recommendations were buy, 25% hold, and 3% sell. In March, the ratio was 71%, 25% and 4%, respectively.

Yet, prices changed dramatically. Sectors linked to the so-called cyclical consumption are among the hardest hit by the general course correction. In retail, which includes large chains such as Americanas, Magazine Luiza and Via, the price target reduction reached 80% of the covered stocks. In segments with better performance, such as oil, upward adjustments predominate, albeit in a more modest proportion.

“Some industries are more resilient, more protected against inflation,” says Antonio Junqueira, head of Latin America research at Citi. “In industries like electricity, for example, it happened less [price target changes] because many companies are natural monopolists, which operate under regulations that define how much money they make. Lights are on in your house regardless of whether GDP grows 2% or falls 2%,” he says.

Gabriela Joubert — Foto: Divulgação

Gabriela Joubert — Foto: Divulgação

The reduction of a price target is not decided overnight. This work usually takes up to three weeks, says Gabriela Joubert, head of research at Inter, a Brazilian digital bank now traded on the Nasdaq. “An analysis of a large exporting company, for example, includes many variables. You have to get data, talk to the company, check information with clients, the network of contacts, distributors, and people in China, and only then change spreadsheets, update numbers, and write a report.”

Inter typically revises models once every six months, but the interval has been reduced to three months. “The macro team is revisiting its estimates more frequently, and as this happens, we need to change our models as well,” Ms. Joubert says.

In calmer times, analysts can push the macro scenario to the back burner and focus on companies and sectors, says Fernando Ferreira, the chief strategist of XP. Amid a turmoil, the work includes following closely and try to measure the impact of any news related to the zero covid policy in China or the signals from European central banks. “The staff ends up working a lot more,” Mr. Ferreira says.

Customer service work has also increased. “We started to hold more live-streaming talks and meetings with the commercial team to try and calm things down a bit,” says Ms. Joubert, with Inter.

“Many investors don’t understand why there are so many changes, so we explain the change in fundamentals,” says Mr. Ferreira, with XP. “Analysts don’t have a crystal ball. They update their assessments according to what is happening.”

The big challenge for the sell side – bank analysts who make recommendations to clients, while the buy side are the managers who manage portfolios – is to be able to change target prices before the stock market in general. “Sometimes this is very difficult, because the market usually moves first,” says Mr. Póvoa, who has worked in both sides and currently is head of analysis at Meta Asset. Besides this, changes must be approved by other departments, such as compliance, which makes the work a little slower than on the buy side.

Regardless of the side, what matters in times of high volatility such as this one is that analysts manage to keep a cool head. “It is very important not to get too excited during the good times of the cycle and not too depressed during the bad times,” says Mr. Junqueira.

*By Nelson Niero, Rita Azevedo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Principal Financial Group picks CEO, plans expansion in Brazil

U.S. group has appointed first CEO in the country since debut in 1999

07/26/2022

Robert Van Dijk — Foto: Silvia Costanti/Valor

Robert Van Dijk — Foto: Silvia Costanti/Valor

Principal Financial Group, a U.S.-based conglomerate with $714 billion under management, has appointed a CEO in Brazil for the first time since its debut in the country in 1999. Robert van Dijk will be in charge of developing and executing the strategy and expansion in the country and making the connection between the local business and the international brand better known.

In Brazil, Principal owns Claritas, an asset management company with R$9 billion under management, and Brasilprev, a joint venture with Banco do Brasil with R$328.7 billion – considering its 25% stake. It has a similar stake in Ciclic, a digital insurance brokerage platform.

According to Barbara McKenzie, senior executive director at Principal Global Investors, the idea of having local leadership is aligned with what Principal has in other markets it considers key to its expansion. “We had one person taking care of each one of the brands, but it was necessary to have a more holistic approach to the business,” she told Valor. “Robert’s presence helps tie the operations of the three companies together better, bringing more traction to the growth as a whole.”

Mr. Van Dijk is a well-known name in the Brazilian capital and investment market. He was the head of Anbima, the association that represents the sector, led Banco Votorantim’s asset management business and spent more than a decade at Bradesco’s asset management company. He had been working recently at Hieron Family Office, a wealth management firm he co-founded in 2019. In his 40-year career, Mr. Van Dijk has previously worked as an adviser to Bovespa and BM&F, the former stock markets now reunited as B3.

The executive will report to Roberto Walker, CEO of Principal Latin America, and Pat Halter, CEO of Principal Global Investors, Principal’s asset management arm.

Despite the interest rate hike in the country, with the key interest rate Selic back to double-digit levels, and the currency depreciation, Brazilians investors are going global, which encouraged the company to strengthen local operations, Ms. McKenzie says. “The timing is never going to be perfect, but as the group looks at the importance of the market and the demand, in the long run [the adverse environment] gets diluted, so it makes sense.”

Principal started in Brazil through its partnership with BB in Brasilprev before buying a stake in Claritas in 2012. The remainder of its stake in the asset management company was acquired in 2016. “The expectation is to continue to see demand for international assets and increasingly be known as Principal,” the executive continues. The individual brands will co-exist but giving greater visibility to the global brand.

Some products from Principal’s international portfolio are already offered in the Brazilian market through third-party platforms. Ciclic can be a channel to deepen distribution, but this is not in the group’s immediate plans.

*By Adriana Cotias — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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