By Paulo Trevisani
Brazilian stocks are facing headwinds as inflation fears return, global dynamics turn unfavorable and domestic uncertainties arise.
The local stock index Ibovespa is down 7% this year, among the worst-performing markets in the world, after rising 22% last year. For comparison, the S&P 500 is up 6% year to date, extending a 24% 2023 rally.
The Ibovespa's soft patch comes as investors pare back their estimates for how much interest rates will go down this year, as domestic inflation proves stickier than previously thought and monetary easing in the U.S. takes longer to start.
"The global environment is having an impact on local stocks," said Sérgio Goldenstein, chief strategist at brokerage firm Warren Rena. "There isn't much space to add risk to portfolios."
Investors are also spooked by President Luiz Inacio Lula da Silva's attempts to interfere in the management of state-controlled oil major Petrlóeo Brasileiro, the country's largest company by market capitalization. The administration is also seen as uncommitted to curbing spending.
Markets are worried about whom the leftist Da Silva will pick to replace Roberto Campos Neto as central bank president. A conservative central banker praised by markets for swiftly fending off post-Covid inflation, Neto has been criticized by government officials for raising interest rates. His term expires later this year.
TS Lombard economists in a recent report summarized the domestic concerns facing Brazilian markets as: "Real interest rates remain high, government meddling in Petrobras, the replacement of Roberto Campos Neto as Banco Central Governor and uncertainty regarding the government's ability to meet the 2024 and 2025 fiscal targets."
The damped mood contrasts with just a few months ago, when falling interest rates heralded a new boost for Brazilian stocks as fixed-income alternatives looked bound to lose their appeal.
"We've been increasing our fixed-income positions," said Etorre Marchetti, chief executive at EQI Asset. He says interest rates are still too high to make stocks more attractive than bonds.
The changing expectations come at the tail end of a remarkable string of moves by Brazil's Central Bank in reaction to rampant inflation related to Covid-19 disruptions.
The central bank raised its Selic rate ahead of its counterparts, and fast. Between March 2021 and August 2022, it raised the benchmark to 13.75% from 2%. Rates were held at that high level for 12 months as inflation decelerated. In August 2023, the bank started cutting aggressively. The Selic is now at 10.75%.
The bank has been cutting the Selic by half of a percentage point at a time, and has indicated another cut of the same magnitude is likely in May. Markets expect a slower pace after that.
Goldenstein said markets are pricing the Selic at around 10% or higher by year end. That is up from 8.75% priced late last year, he said.
Brazil's sovereign debt also pays lofty yields compared to the U.S. The 10-year Brazilian government bond pays 12%, compared with 4.6% by the U.S. 10-year Treasury, even as inflation is at similar levels. In the 12 months through March, Brazilian prices rose at a 3.9% pace, down from 12% in April 2022. For comparison, the U.S. CPI was 3.5%.
According to Morgan Stanley, equity funds in Brazil had 1.8 billion Brazilian reais ($351 million) in net outflows in 2024 as of early April, compared with 4.1 billion reais in net inflows for all of last year. Fixed income funds had 145.6 billion reais net inflows this year, reversing outflows of 57.2 billion in 2023.
Although a migration into stocks is being delayed, it is still forecast to happen once borrowing costs get into single digits. The expected U.S. easing, when started, will also likely push some investors to take more risks in emerging markets, analysts said.
Morgan Stanley analysts see a strong case for the energy and agricultural sectors amid growing exports, and also for financials and sectors likely to benefit from declining interest rates.
"We should expect further rate cuts, material rate cuts to come through" in Brazil, said Varun Laijawalla, co-portfolio manager of Emerging Markets Equities at Ninety One. He recommends adding risk to investment portfolios. "Are you still paid to sit on fixed income to the extent you were? I don't think so."
Laijawalla said real estate stocks residential builder Cyrela Brazil Realty and shopping mall developer Multiplan could benefit from falling financing and borrowing costs and a resulting increase in disposable income for consumers.
Cyrela is down 11.5% this year but up 36% in 12 months. Multiplan is down 15% and 7%, respectively.
Banks could also benefit. "Brazil is near the peak of its non-performing loan cycle," he said. Laijawalla likes, in particular, state-controlled Banco do Brasil, which is flat this year and up 28% in 12 months.
Write to Paulo Trevisani at paulo.trevisani@wsj.com
(END) Dow Jones Newswires
April 17, 2024 11:52 ET (15:52 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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