A relevant factor for the downfall of Ibovespa in the second half of 2021, the water crisis has given clear signs of slowing down, which opens space for a correction in several sectors of the Brazilian stock market that have not yet anticipated the new scenario. The improvement in the water scenario, therefore, supports the prospect of a stronger performance ahead of Brazil’s major stock index, by influencing not only the energy segment, but also shares linked to the national economy, which are sensitive to the yield curve and inflation and can feel the changes in the environment.

According to the last monthly bulletin released by Brazil’s national grid operator ONS, the levels of the reservoirs of the hydroelectric plants in the Southeast and Central-West regions are likely to continue to recover after heavy rains between January 8 and 14 and reach the end of the month with 40% capacity, while the North, Northeast and South regions are expected to reach 73.2%, 70.2% and 34.8%, respectively. Based on this, managers expect the situation to continue to improve at least until the end of the summer in Brazil, which may drive changes in stock portfolios.

The strongest impact can be felt both by generation and distribution companies, said Marcelo Sandri, an electrical sector analyst at Perfin Investimentos. “Hydroelectric generation companies suffered a lot last year,” he said. He explains that when the mills fail to deliver the agreed amount of energy, they need to buy it on the free market, and with high electricity prices, margins ended up being squeezed. On the other hand, thermal plants had a positive year in 2021 as the thermal complex was activated to offset low reservoirs.

With heavy rainfall in the reservoirs, the scenario for hydroelectric and thermal generation companies is expected to reverse in 2022, Mr. Sandri argues. “We believe that the electric sector on the stock exchange has not yet reacted, in terms of prices, to such positive news for the segment. The chance of a power rationing is close to zero. You have removed a very big tail risk, which was a cloud that weighed very heavily last year,” Mr. Sandri said. Cesp’s preferred stock, for example, fell 10% in the second half of 2021 and rose 6.04% this year.

The analyst still sees a difficult scenario for distributors, but sees a better situation for them than last year. “As much as there is a tranquility effect from the standpoint of power supply, we will probably see high adjustments due to the burden of inflation and high electricity costs last year due to the use of thermal plants.” As a result, according to him, the risks of default and the propensity for energy theft grow.

Besides the improvement in the water scenario in Brazil due to the characteristic of housing companies that are good payers of dividends and that have stable cash flow, Mr. Sandri said, the electric sector can bring good returns to investors this year. “It is a defensive sector and this will help a lot in a year expected to be of high volatility in local financial assets because of the elections,” he said.

In the same vein, Guto Leite, Western Asset’s equity manager, said he has found interesting metrics in some distribution and generation stocks. “Apart from the transmission companies, which have already performed well last year and are not impacted by this type of occurrence, there are companies with attractive numbers. There´s also micro factors that must be analyzed, such as Eletrobras’s privatization or Cesp’s restructuring,” he said. Mr. Leite added that some of his firm’s funds already had Equatorial securities and are likely to increase their exposure to the sector in the coming months.

Another sector that could change along with the rainfall rates is the mining sector and, consequently, the steel industry. Rainfalls reduce the productivity of the sector, which is higher in the second half of the year, says Isabel Lemos, manager at Fator Ações. Thus, what investors usually monitor are possible supply bottlenecks and operational problems, such as dam failures. “A possible reduction in supply can put pressure on prices in the very short term and, in case of drastic drops, require a new evaluation of the asset,” Ms. Lemos said.

After halting activities for a few days in mines located in Minas Gerais, Vale and Usiminas have already resumed production, although gradually. But the return also depends on their logistical partners’ capacity, since part of the road and rail networks in the state also suffered from strong rains.

Considering this factor, William Leite, manager at Helius Capital, made moves to mitigate potential short-term impacts. “We believe that the developments of the last few days will not be so relevant for the companies in the sector in corporate terms, but we have made some changes to avoid these possible low probability events,” he said. Mr. Leite explained that he exchanged part of the exposure to local mining companies for Australian rivals and set up a hedging structure with derivatives.

There is also, in a more indirect way, a possible impact on securities linked to the national economy, sensitive to the yield curve and inflation. Analysts disagree about when this will occur, but a likely change in tariff flags in the coming months, which would lower electricity bills, may help to reduce the impact on prices.

Rafael Cota Maciel, the equity manager at Inter Asset, believes that the scenario is still one of inflationary pressure on a global level, but the rains and a less deadly variant of the coronavirus may help to somewhat calm the local market in the coming months.

Renan Vieira, Taruá Capital’s manager, feels the same way but says that the search for low-priced securities has been increasingly dynamic. “We see many securities selling at a discount, but the environment is still challenging. With funds still suffering from withdrawals and in need for selling assets, the situation requires active management and a close look at the companies’ fundamentals,” he said.

Source: Valor international

https://valorinternational.globo.com/