Small Caps Rule Bovespa as Stimulus Skips Vale: Corporate Brazil
Brazilian small-cap shares are surging to their most expensive level in three years relative to the Bovespa index as government stimulus sparks rallies in stocks from education company Anhanguera Educacional Participacoes SA (AEDU3) to bus maker Marcopolo SA. (POMO4)
The BM&FBovespa Small Cap (SMLLBV) index rose 23 percent this year, more than twice the main stock measure’s 8.9 percent gain. The rally helped push shares in the index to 1.59 times their book value this month, up from a three-year low of 1.33 in June and the highest compared with the Bovespa since February 2009. The index contains stocks with a combined market value of less than 15 percent of the total market capitalization of all publicly traded Brazilian companies.
Government stimulus from tax cuts on appliances to increased infrastructure investment is fueling a recovery that is benefiting small-cap companies more than their larger peers. Consumer stocks account for 30 percent of the small-cap index, almost three times as much as their share of the Bovespa. Commodities producers, which are being hurt by slowing demand from China, account for 43 percent of the benchmark’s weighting.
“We look at the domestic market as the main factor to allocate our resources,” said Herculano Alves, the head of equities at BRAM Bradesco Asset Management, which manages 279 billion reais ($137.8 billion) in Sao Paulo, including small-cap stocks such as Marcopolo and Anhanguera. “The economy isn’t growing overseas, and here we have growth in credit and wages.”
Minerva SA, Brazil’s third-largest beef producer, was the best performer among the small-cap gauge’s 71 members this year, jumping 116 percent. Marcopolo has added 70 percent, and Anhanguera rallied 62 percent.
Brazil’s economy in July expanded at the fastest pace in almost a year, the central bank said. The economic activity index, a proxy for gross domestic product, rose 2.34 percent from a year earlier after rising 0.99 percent in June, according to data released on Sept. 14. The forecast was for a 2.1 percent expansion, according to the median estimate of 23 economists surveyed by Bloomberg.
Anhanguera’s competitor, Kroton Educacional SA (KROT3), has jumped 89 percent this year. Education companies are benefiting from the government’s decision to expand the student-loan program known as FIES, which gives graduates as many as three times the number of years taken to get a college degree to pay the debt, said Alves.
In addition to recent acquisitions made by the company, “there are good expectations in general for the educational sector, which is helping the perception of the company’s stock,” Kroton Investor Relations Director Carlos Lazar said in an e-mailed statement. Anhanguera declined to comment.
While small caps rally, gains among stocks with the heaviest weightings on the Bovespa, such as oil company Petroleo Brasileiro SA (PETR4) and iron-ore producer Vale SA (VALE3), are being limited by the slowdown in China, Brazil’s top trading partner, which pushed commodities lower, said Pedro Galdi, head strategist at SLW Corretora.
Petrobras, as Brazil’s state-run oil company is known, has added 7 percent this year. The producer in the second quarter reported its first loss in 13 years. Vale, the world’s largest iron-ore miner, has declined 0.7 percent. Both companies are based in Rio de Janeiro.
Vale’s press office declined to comment.
Cars, Buses, Trucks
Caxias do Sul, Brazil-based Marcopolo has benefited as the government steps up purchases of vehicles and cuts payroll taxes to bolster the recovery in Latin America’s largest economy, Carlos Zignani, director of institutional relations at Marcopolo, said in an interview.
Brazil added 6.6 billion reais to money set aside this year to purchase buses, tractors, trucks and other equipment, Finance Minister Guido Mantega said in June.
“Small-cap stocks have benefited from Brazil’s plans to increase investments in infrastructure, boosting companies that operate with ports, railroads and logistics,” Galdi said by phone from Sao Paulo.
The government’s policy to boost Brazil’s domestic market should keep pushing small-cap stocks higher, even now that the Bovespa index trades at cheaper valuations, Bradesco’s Alves said.
“If we think Brazil will grow 3.5 percent to 4 percent in 2013, those companies should continue to do well,” Alves said. “What’s the better option, to put money in fixed income, with interest rates falling, or to invest in a company that’s expanding?”
While the small-cap index is expensive when compared with the Bovespa, the Brazilian gauge for companies with lower market capitalization is still cheap when compared with similar measures in the U.S. and Europe, Alves said.
Stocks in Brazil’s small-cap index trade at an average of 20.8 times analysts earnings’ estimates for this year, compared with a ratio of 24.9 for the S&P 600 Small Cap (SML) index in the U.S. and 29.4 for the FTSE Small Cap (SMX) index in the U.K. The Bovespa trades at a ratio of 20.5 times its earnings estimates and 1.25 its book value, a measure of a company’s net worth calculated by taking the value of assets and subtracting the value of liabilities.
The small-cap index will outperform the Bovespa for the next three years, as the outlook for the Brazil’s growth improves while the global economy struggles to rebound, said Roberta Kosaka, who manages small-cap funds at Banco Itau BBA SA.
“If we look at the Brazilian economy, things have improved a lot in the past 10 years,” Kosaka said by phone from Sao Paulo. “The outlook for Brazil in the next three years is positive, while for the world, if it’s not catastrophic, it’s more risky.”
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