Brazil Strategists Say Valuations May Be Entering New Normal
After a 46% record-breaking rally over the past two years some investors would be forgiven for thinking Brazil’s stock market looks expensive.
Still, strategists from Bank of America Corp. to JPMorgan Chase & Co. to Banco Santander Brasil SA are saying that Brazil’s stock market will continue to trade at a premium to historical valuations, and argue that additional gains may be just around the corner.
By Vinicius Andrade
21 de janeiro de 2020, 19:13 WET
Ibovespa will be expensive relative to history, JPMorgan says
Brazil enters ‘uncharted territory’ as reforms advance: BofA
After a 46% record-breaking rally over the past two years some investors would be forgiven for thinking Brazil’s stock market looks expensive.
Still, strategists from Bank of America Corp. to JPMorgan Chase & Co. to Banco Santander Brasil SA are saying that Brazil’s stock market will continue to trade at a premium to historical valuations, and argue that additional gains may be just around the corner.
At Monday’s close, Brazil’s benchmark Ibovespa index traded at 14 times forecast earnings, the highest multiple in more than three years and above the five-year average of 11.9 times, data compiled by Bloomberg show.
“Looking at historical multiples could be misleading,” David Beker, a Latin America equity strategist at BofA, wrote in a report Tuesday. Brazil “is now in uncharted territory,” with structural reforms moving forward and the central bank slashing the benchmark interest rate to a record.
Assuming a lower cost of capital, BofA calculated that the Ibovespa’s new fair value multiple could be closer to 15 times forecast earnings.
The rally in Brazilian stocks has been driven by early signs of accelerating economic growth and legislative progress for the government’s market-friendly agenda -- including an overhaul of Brazil’s social security system. The optimism has also been reflected in Brazil’s credit default swaps, a hedge against losses on sovereign debt, which are trading at prices last seen in 2010.
JPMorgan strategist Emy Shayo says that other countries that moved forward with so-called structural reforms -- such as India and Mexico -- have been expensive for “significant” periods of time. “Valuations are a side note on the Brazil story,” strategists led by Shayo wrote in a Jan. 6 report.
An additional source of upside might be earnings growth, Banco Santander Brasil strategists Daniel Gewehr and Ricardo Peretti say. According to their estimates, about 78% of the Brazilian rally seen from mid-September 2018 through Dec. 26, 2019, was caused by higher price-to-earnings ratios, while earnings revisions contributed just 22%.
“We see slightly higher EPS revisions from now on, with accelerating GDP growth in 2020 being incorporated in consensus estimates,” Gewehr and Peretti wrote in a report Jan. 6. “The earnings movie is better than the valuation photo.”
— With assistance by Ricardo Strulovici Wolfrid |
