Despite the good performance of the Brazilian stock market this year, the market gains are concentrated in a restricted group of stocks, the destination of foreign investment in recent weeks. The focus has been on consolidated, liquid companies and not always with fundamentals that justify a long-term bet.
In the year, Ibovespa, the stock exchange’s main index, rose 7.68%, while the Small Caps, which includes companies with smaller capitalization, dropped 0.43%. Of the 90 stocks that make up the Ibovespa, only 39% outperform the index.
The group comprises stocks from the financial, raw materials and energy sectors, which have been the target of global investors. But, according to Valor Data, only ten shares account for 94.4% of the gains accumulated by the Ibovespa in the year. These are securities from companies such as Vale, Petrobras, Itaú, Bradesco, B3, Banco do Brasil, Hapvida and BTG Pactual.
With the exception of Hapvida, all stocks are raw materials exporters or companies in the financial sector. Altogether, they have a total weight of 49.8% in the Ibovespa theoretical portfolio, a fact that further highlights this discrepancy – the other half of the index accounts for only 5.6% of the accumulated gains in 2022.
Also noteworthy is the fact that, of the 90 stocks that make up the Ibovespa, only 35, or 39%, outperform the index. This group also includes stocks from the financial sector and raw materials, in addition to energy shares, the destination of the global investor, who is zeroing out positions in growth stocks.In 2022, foreigners increased their long position in B3 by R$58 billion — institutional investors reduced their position by R$48 billion.
For analysts, part of the foreign flow arrives in the country because the bonds seem cheap, due to the exchange rate. Guto Leite, with Western Asset, says that foreign investors have returned, but have opted for more liquid stocks.
He explains that the external flow, at first, focuses a lot on purchases through ETFs [exchange-traded funds] and this ends up having a greater impact on more liquid companies. “As the scenario is opaque, in general, privileging this type of bonds also makes sense,” says Alexandre Cancherini, manager at Frontier Capital.
For Daniel Gewehr, portfolio co-manager with WHG asset, the Brazilian stock exchange is benefiting from the global movement to search for value stocks, and no longer for growth stocks, after the world’s central banks, especially the Federal Reserve, prepare the monetary policy normalization cycle. “Brazil is perceived as a value market, 70% of the Ibovespa is made up of this type of bonds,” he says. “Russia is also a value market, but due to geopolitical issues, part of the flow that could migrate to that market may be coming to Brazil.”
For André Lion, partner and CIO of Ibiúna Investimentos, it is also necessary to consider the global investor reduced exposure to Brazil, both on the stock exchange and exchange in 2021, and became “underweight”. This global adjustment of positions opened space, therefore, for this investor to return to Brazil, especially attracted by stocks with attractive valuations, such as commodities, banks and steel. “But not everything is cheap,” he warns.
According to Mr. Lion, the Ibovespa is currently traded at a price-to-earnings ratio of 8.5 times, below the historical average of 11 times. Stocks linked to commodities, in turn, are currently traded at 6.6 times, with Petrobras having a price-to-earnings ratio of 5.8 times. But when considering only the group of stocks that are neither of state-owned companies nor linked to commodities – companies that reflect more directly the local economy, therefore – the multiple is higher, at 13.6 times.
In any case, Mr. Lion considers that the conditions for the external flow to continue reaching Brazil is likely to remain in the coming months. He says that, in addition to the fact that the valuation remains relatively attractive, favorable conditions for the exchange rate may even increase, as the Selic policy interest rate rises and the carry trade expands. In addition, with the interest rate hike by the Fed, the movement of migration from growth positions to value stocks is expected to intensify. “The Fed has only started to reduce purchases, soon it will completely withdraw the stimulus. This will have an impact on the market,” he says.
Mr. Gewehr, with WHG, also believes that the flow of external capital is likely continue, but at a slower pace. And it will continue to focus on the so-called “blue chips” [companies with greater liquidity and capitalization]. He says that the Ibovespa’s fair price today is a little below 11 times, according to the price-to-earnings ratio metric, which means that the stock market is still attractive.
“The Ibovespa trades with a 30% discount, while the world has a 10% premium, Brazil is still cheap in relative terms,” he says. “Our global fund chose to have some exposure to Brazil because the stock exchange looks interesting today.”
The negative point, he observes, is the profits projections of the companies that make up the Ibovespa, a fall of 12% in 2022. “In the tripod that investors consider to invest in the stock market, we have a good valuation, and also low allocation. What is missing is an upward revision of profits,” he says. Another risk, he points out, is the behavior of commodity prices. “It’s an investment that makes sense, but it’s risky.”
Source: Valor International