Home Bovespa Barron’s asks: Brazil Economy In ‘Great Rotation’, Buy Cyclical Stocks?

Barron’s asks: Brazil Economy In ‘Great Rotation’, Buy Cyclical Stocks?

Brazil's economy could expand by 3% next year, earnings estimates and stock allocations don't reflect the upside, BofA analysts argue

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Brazil’s corruption investigations and political turmoil have lasted so long, it is easy to be cynical about the investing opportunity. But with the economy set to double the pace of expansion in 2018, Bank of America Merrill Lynch spies an opportunity.

BofA economists expect 3% GDP growth for Brazil next year. BofA analysts Felipe Hirai and Nicole Inui in Brazil write:

“Brazil GDP for the second quarter of 2017 surprised on the upside, growing 0.3% year on year, versus a 0.4% decline previously and is the first year on year growth in GDP since the first quarter of 2014. Private consumption was the positive highlight, growing 0.7% year on year compared to a negative 1.3% year on year read in the first quarter of 2017 … Consumer credit growth and confidence levels are also heading higher. Investments, however, remain weak as the decline in investments accelerated in the second quarter and corporate credit growth is still negative.

… Allocation to equities remain low, as mutual funds still hold less than 4.5% of portfolios in equities (versus 14% in 2010.) As the SELIC [benchmark interest rate] continues to decline, we expect allocations to equities to increase over time, supporting a strong performance over the next 12 to 18 months. Given expected added earnings growth for 2018, we are revising higher our year-end Ibovespa target to 75,000. We believe EPS estimates for Ibovespa could return to 6000 points (4% above current levels), if consumer proxies factor in more accelerated top line growth in 2018. We maintain our current target P/E of 12.5x (22% above historical levels) ….

Companies and sectors most linked to the domestic economy, such as consumer discretionary and capital goods, could see earnings per share estimates moving higher as better economic growth is priced in. Analysts expect little acceleration in top-line growth in 2018 versus 2017. Same store sales growth for retailers on average is estimated to increase 6.4% in line with 2017 levels, volume growth for consumer staples is estimated to have a tepid recovery with volume growth of zero to 4%. For homebuilders, launches are expected to increase 26% over 2017, but still remain below 2011 levels for most companies. … Given the sectors low weighting in the index and still muted growth from financials, we expect a bigger earnings impact on the index for 2019 …”