Brazilian stocks that depend most on domestic demand will likely gain even as interest rates climb, Banco Santander SA and Raymond James & Associates Inc. said.
Santander strategist Marcelo Audi said in a note today that investors should buy homebuilders such as MRV Engenharia & Participacoes SA and retailers such as Cia. Hering after recent underperformance. Daniela Bretthauer, an analyst at Raymond James, recommended buying shopping-center owner BR Malls Participacoes SA and retailer Cia. Brasileira de Distribuicao Grupo Pao de Acucar, citing growth prospects and valuation.
Companies that rely on consumer purchases are the best performers in Brazil this year even after the central bank raised borrowing costs three times from a record low. Tobacco company Souza Cruz SA leads gains with a 56 percent climb, while clothing retailer Lojas Renner SA is second after surging 51 percent. The Bovespa is up 1.7 percent. Central bank policy makers will raise the benchmark Selic interest rate by 1.5 percentage points to 12.25 percent next year, according to the median forecast in a central bank survey published today.
“The early stage of a monetary tightening reflects strong economic momentum,” Santander’s Audi wrote. “The real danger, we believe, is the end of the tightening cycle, when the first signs of economic weakness begin to surface.”
Audi said the time to cut “domestic cyclicals” may come in the second quarter of 2011.
Credit growth may be limited by the central bank’s Dec. 3 increase of reserve and capital requirements, and as borrowing costs climb, according to Raymond James.
“Higher interest rates are nothing new for Brazilian shoppers, but will certainly make buying goods on credit more expensive in 2011,” Bretthauer wrote. “Rich” valuations mean investors should be selective with stocks that benefit from consumer demand, she wrote.
MSCI’s index of Brazilian “consumer-discretionary” stocks, which includes Renner, MRV and Hering, trades at 18.2 times earnings, compared with a ratio of 14 for the Bovespa, data compiled by Bloomberg show.