by Will the recent upheaval in Brazil’s political leadership lead to a stronger economy? Investors certainly think so. Fueled by anticipation of embattled president Dilma Rousseff’s impeachment and economic reforms by her replacement, Michael Temer, the Bovespa has jumped more than 50 percent since late January. In the week after Rousseff’s official ouster on August 31, the index rose a full 4 percent, and Brazilian consumer confidence reached its highest level since January 2015 that same month. But Brazil’s rising economic tide won’t lift all boats equally. Equity strategists on Credit Suisse’s Global Markets team have highlighted those sectors best poised for a strong recovery themselves. Consider the real estate sector, specifically shopping malls. Things haven’t been so good of late: Mall operators charge rents based on tenants’ sales, and same-store sales growth rates for mall retailers have been declining since the fourth quarter of 2014. In the second quarter of 2016, mall same-store sales actually shrank by 0.5 percent, but the Bank’s strategists believe that outright decline marked a trough. They predict consumers will spend more at mall stores as Brazil’s economy—and its employment situation, in particular—improves. By the second quarter of 2017, the Bank expects same store sales growth of 4.8 percent.
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Alice Gomstyn considers the following as important: banks, Brazil, Investing: Features, malls, paper, pulp, retail, steelmakers, stocks
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Will the recent upheaval in Brazil’s political leadership lead to a stronger economy? Investors certainly think so. Fueled by anticipation of embattled president Dilma Rousseff’s impeachment and economic reforms by her replacement, Michael Temer, the Bovespa has jumped more than 50 percent since late January. In the week after Rousseff’s official ouster on August 31, the index rose a full 4 percent, and Brazilian consumer confidence reached its highest level since January 2015 that same month. But Brazil’s rising economic tide won’t lift all boats equally. Equity strategists on Credit Suisse’s Global Markets team have highlighted those sectors best poised for a strong recovery themselves.
Consider the real estate sector, specifically shopping malls. Things haven’t been so good of late: Mall operators charge rents based on tenants’ sales, and same-store sales growth rates for mall retailers have been declining since the fourth quarter of 2014. In the second quarter of 2016, mall same-store sales actually shrank by 0.5 percent, but the Bank’s strategists believe that outright decline marked a trough. They predict consumers will spend more at mall stores as Brazil’s economy—and its employment situation, in particular—improves. By the second quarter of 2017, the Bank expects same store sales growth of 4.8 percent.
More shopping would also provide a boost to Brazil’s ailing retail sector. That said, many consumer stocks look overvalued. The 12-month forward price-to-earnings ratio for the sector was more than two standard deviations above its five-year average in late August even though earning trends were still negative. “The Street already anticipated a substantial improvement from 2017 onward,” say the Credit Suisse strategists.
What’s more compelling on the valuation front? Bank stocks. Credit Suisse has taken a more balanced view on Brazilian banks after being bearish on the sector for more than a year due to a combination of downward earnings revisions and the country’s ongoing political drama. The outlook for credit and revenues remains weak as borrowers continue to deleverage, and Credit Suisse believes that private-sector banks will just barely meet their cost of equity over the next 12 to 18 months. The ROE of public-sector banks, meanwhile, is expected to fall short of their cost of equity for the foreseeable future. Return-on-equity concerns notwithstanding, however, shares of bank stocks are soaring because of the steep decline in sovereign risk following Rousseff’s ouster. As of September 12, large-cap bank stocks were up more than 45 percent year to date. Even so, Credit Suisse’s strategists think valuations are still reasonable, with an average price-to-earnings ratio of 11.5x forecasted for this year.
Stocks of Brazilian steelmakers are also in the throes of a rally, with shares of some delivering year-to-date returns of more than 100 percent as through mid-September. Unlike the banks, however, steel’s recovery is just as much an international story as it is a domestic one. After seeing lows of below $260 per metric ton in December 2015, prices of benchmark hot-rolled coil exports from Europe and China were up 49 percent and 53 percent, respectively, in late August. This can be attributed to steel mills and traders around the world restocking inventories after what strategists call an “overly aggressive” period of destocking last year in response to the late 2014 to first-quarter 2016 slide in steel prices. On the domestic front, the Bank’s equity strategists say a three-year-long contraction in the domestic steel market is over, and Brazilian steel consumption will increase next year, driven by continuing improvement in industrial production, which rising for the past five months.
One industry that’s being left behind during Brazil’s comeback: the country’s producers of wood pulp, the key ingredient in paper. Brazil, which has fast-growing trees, dense forests, and low-cost production, has long had a competitive advantage in the pulp business. In recent years, however, pulp producers around the world launched expansion projects in an effort to meet growing demand from developing countries, especially China, but that expansion went too far, the Bank says. Credit Suisse now projects a significant oversupply in pulp markets in 2017. Brazilian producers also face a more immediate problem: Chinese paper makers have been aggressively negotiating down pulp prices to compensate for their own poor margins in 2015. As of mid-August, pulp prices in China were below $460 per metric ton, down from $650 in September 2015. The recent appreciation of the Brazilian real puts even more pressure on pulp producers’ export margins. Equity strategists say capacity reductions by pulp producers could help, but failing that, they’re in for another bleak year.
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