Cigarettes, cosmetics and credit cards are handing investors in Brazil their best returns.
Credit-card processor Cielo SA, tobacco producer Souza Cruz SA and cosmetics maker Natura Cosmeticos SA are offering the Bovespa index’s highest returns on common equity, a measure of the ability to generate profits from shareholder cash, data compiled by Bloomberg show. Cielo posted a third-quarter return of 135 percent. Souza Cruz and Natura each had a 89 percent return, topping the 12 percent average for all Bovespa stocks.
Record-low interest rates, falling unemployment and expanding access to credit are fueling a surge in spending in the world’s second-largest emerging economy. The consumer sector is giving investors a refuge from government interference that dragged down banking, utility and telephone stocks last year, said Catarina Pedrosa, an analyst at BES Securities.
“In terms of risk and return, the retail and consumer sector will continue to be attractive amid less government interference,” said Julia Monteiro, an analyst at Caixa Geral de Depositos in Rio de Janeiro. “We have seen that the stocks are resilient. Any stock linked to the domestic market will continue at various levels being protected.”
Seven of the top 10 companies offering the best returns on equity are consumer stocks, including brewer Cia. de Bebidas das Americas and retailers Lojas Americanas SA, Cia. Hering and Lojas Renner SA, data compiled by Bloomberg show.
Airline Gol Linhas Aereas Inteligentes SA and builder Gafisa SA had the worst returns on equity at negative 61 percent and negative 33 percent, respectively.
Brazilian President Dilma Rousseff used interventionist policies last year to try to spur a rebound in the economy. She ordered power utilities and phone companies to reduce prices, capped auto imports from Mexico and cut taxes on consumer goods. Growth probably slowed to 1 percent in 2012, according to economists surveyed by Bloomberg, from 2.7 percent in 2011 and 7.5 percent in 2010.
Consumer stocks “are areas that the government and the external market weren’t able to reach,” Pedrosa said in a telephone interview from Sao Paulo. “That’s why these companies did better.”
Cielo, based in Barueri, Brazil, probably will post a record quarterly profit of 622.1 million reais ($304.7 million) in the three months through December, up 27 percent from a year earlier, according to the average of seven analysts’ estimates compiled by Bloomberg.
AmBev, Latin America’s largest brewer, surpassed Petroleo Brasileiro SA as the region’s largest company by market value in November after the state-run oil producer posted its first net loss in 13 years in the second quarter.
“Last year, part of the upside here had to do with investors looking for defensive companies,” said Lauren Torres, an equity analyst at HSBC Holdings Plc in New York. “These types of industries do offer the growth profile that investors like during market volatility.”
AmBev rose 27 percent in 2012, compared with a 7.4 percent gain for the Bovespa index and a 9.2 percent drop for Petrobras. Oil startup OGX Petroleo & Gas Participacoes SA plunged 68 percent and Centrais Eletricas Brasileiras SA, the government-controlled utility known as Eletrobras, declined 61 percent.
A rally in consumer stocks has driven up price-to-earnings multiples. Lojas Americanas trades at 30 times estimated 2013 earnings, while Souza Cruz’s multiple is 25 and Natura’s is 23. That compares with a median of 15 for Bovespa stocks.
Lojas Americanas fell 0.4 percent to 17.88 reais at 11:24 a.m. in Sao Paulo trading. Souza Cruz fell 0.8 percent to 32.08 reais, while Natura rose 0.2 percent to 55.69 reais.
“Shares have more expensive multiples, but in many cases, it is warranted,” Will Landers, a portfolio manager of Latin American equities at New York-based BlackRock Inc., said in a written response to questions.
Many of the gains in the consumer sector last year were cyclical and not structural, said Marco Freire, head of fixed income at Franklin Templeton Investimentos.
“Consumers have returned and part of industrial production has also returned,” he said in an interview in Sao Paulo. “Whether investment will improve to the extent that’s needed for Brazil in the long run to have sustainable growth, I’m more skeptical. I think that, yes, there will be an improvement in consumption, in investment, but whether it’s enough, I don’t know. Brazil doesn’t have the incentives to invest.”
While companies focused on local consumption will continue to be strong bets this year, they may not post the same returns as last year, Caixa Geral’s Monteiro said. Companies will open fewer stores in 2013 than originally expected, she said.
“There is still a lot of space for these companies to do business,” Monteiro said. “The domestic market will decelerate, but will still grow at a positive rate.”
Even with weaker-than-expected economic growth in 2013, retailers and consumer-products makers should still rally, Landers said.
“My expectation that we could see a positive surprise in growth this year is losing strength,” he said. Still, “I continue to be positive on the domestic sector -- lower interest rates the whole year, lower bank spreads, full employment, salaries increasing in real terms -- all of this indicates that domestic consumption should be better.”