For UBS, local market may outperform other emerging markets in coming months
09/26/2022
The Brazilian stock market will not remain immune to the instability that the rise in interest rates in the United States causes in global markets, but it is expected to continue to show a better performance than its peers in the coming months.
In UBS Wealth Management’s view, the securities prices – below the historical average and incompatible with the fundamentals –, the less vulnerability to the global liquidity reduction, and the high dividend yields are likely to help that, compared to other emerging markets, Brazil remains more attractive in the next 12 to 18 months.
For Ronaldo Patah, investment strategist with UBS Wealth Management in Brazil, the uncertainties coming from the monetary tightening cycle conducted by the Federal Reserve prevent a clear trend to be pointed out for the stock market. The scenario suggests a lot of instability since the interest rate hike is not over and asset prices have not been fully adjusted. “I don’t see an unequivocal upward trend in the stock market, but even on bad days, Brazil tends to perform better,” he says. “Brazil has advantages in terms of fundamentals at the moment, such as GDP performance and the level of interest rates.”
Mr. Patah recalls that after years at the bottom of the league, the Brazilian stock market has recovered, and this year has the best performance among the emerging economies. The MSCI Brazil index rose 5.72%, compared to a 26% drop in the MSCI for emerging markets. But, despite that, the reading is that the stock discount remains high: UBS estimates that the Brazilian stock market today trades at a 43% discount compared to the group of emerging markets. When looking at the price-to-earnings ratio (which takes into account the projection for companies’ profits over the next 12 months), the multiple is at 6 times, 2.5 standard deviations below the average of the last ten years.
The Brazilian stock market could also benefit from commodity prices, which are expected to remain high. This scenario helps because more than 38% of its market value comes from companies linked to the segment. High-interest rates help stocks in the financial sector. “Brazilian stocks are being traded at an average dividend yield of 10% to 12%, much better than what other exchanges offer,” he says.
This scenario of tighter local monetary policy and high commodity prices also benefits the exchange rate dynamics. According to Mr. Patah, with UBS, if the world goes through a “soft landing” (soft deceleration of the economy), the fair exchange rate in Brazil is R$5 to the dollar, despite the end of the monetary tightening cycle – which puts the perspective of a reduction of the Selic key rate at some point in the medium. “The resilience of Brazil’s foreign accounts can help the country navigate through a long period of a liquidity shortage,” says UBS.
According to Mr. Patah, there may be a flow of external resources to the stock market after the election. “It is difficult to predict, but the fact is that the global market is still very liquid,” he says.
He says that today, the market has “priced in” the victory of former President Luiz Inácio Lula da Silva (Workers’ Party, PT), and no major change is expected in terms of economic policy. “But it’s still an uncertainty, which means it’s possible that after the two rounds of votes, there will be a change in the prices of the stock market and the exchange rate.”
For Anand Kishore, equity manager with Daycoval Asset, despite the strong volatility expected at least until the end of the year, local assets are ahead of their peers in terms of attractiveness. With this, there are two risks to be monitored in the face of the Fed’s monetary tightening cycle: revisions in the earnings of listed companies with the expected slowdown in global activity and the growth of discount rates in all asset classes.
“If the world’s largest economy slows down, there are global consequences in terms of growth and Ibovespa suffers indirectly from this. There will be earnings revision all over the world and here too, on a smaller scale. Moreover, with the Fed Funds going up, the discount rate gets higher for all assets. But when the U.S. interest rate starts to impact inflation, the domestic monetary tightening will be done. So, even if all markets fall, the local one tends to fall less,” he says.
Mr. Kishore sees more room for assets linked to the domestic economy and banks to advance next year, given the discounted multiples, the end of the interest rate hike, and the resilience of activity. Regarding commodities, and despite seeing support at current levels, the uncertainties in China may weigh on Vale, while Petrobras may have difficulties advancing in case of Mr. Lula da Silva’s victory. The bank projects Ibovespa will reach 150,000 points by the end of 2023.
Santander, in turn, projects Ibovespa at 140,000 points. According to the report signed by analyst Aline Cardoso, the market may price cuts in interest rates earlier than expected, reflecting the drop in inflation. The bank also affirms that there is a 70% probability of a soft landing for Brazil, against 30% of a hard landing (deceleration with a greater chance of recession). Globally, the chances of a hard landing are 40%, against 30% of a soft landing and 30% of stagflation.
Even with the largely positive relative vision among market agents, Fernando Bresciani, investment analyst at Andbank Brazil, gives a warning. “The stock market is a reflection of the external markets. Nothing guarantees, and it seems unlikely, that foreign investors will buy Brazil while the other markets melt down. Besides this, as of the second half of next year, the measures of the new government will take effect. It depends a lot on what is going to be done,” he says.
“But the local activity and environment are better at the moment, the earnings season is expected to be good and with positive guidance, companies are more deleveraged. The moment is positive.”
*By Lucinda Pinto, Matheus Prado — São Paulo
Source: Valor International