Worst Stock Pickers Burned by Bovespa Rout: Corporate BrazilJulia Leite and Ney Hayashi
Brazilian analysts are proving to have the world’s worst record for picking stocks after failing to foresee how government intervention in the economy would curb growth and cut into corporate profits.
Stocks on the benchmark Bovespa index are trading 45 percent below the price targets that analysts set a year ago, the biggest disparity among the 45 markets in the MSCI All-Country World Index, according to data compiled by Bloomberg. Homebuilder Rossi Residencial SA and electric utility Centrais Eletricas Brasileiras SA are trading as much as 85 percent lower than prices forecast by Sao Paulo-based analysts at Itau Unibanco Holding SA and Barclays Plc.
The slowdown in Latin America’s biggest economy deepened last year, confounding analysts who predicted the lowest interest rates on record and President Dilma Rousseff’s stimulus measures would spark a rebound. The government moves, which included pressuring utilities to lower electricity rates and pushing banks to cut profit margins, have instead eroded investor confidence and stunted growth, according to Nicholas Cowley, an investment manager at Henderson Global Investors Ltd.
“Analysts are always more positive than they should be,” Cowley, who helps oversee about $100 billion, said by phone from London. “They always assume a reasonably healthy economy, and in Brazil at the moment we’ve had quite a lot of disappointments. There’s a lot of political uncertainty with a lot of intervention from the government.”
Analysts overestimated corporate earnings for a fifth straight quarter, the longest such stretch since 2007, in the October-to-December period. Sixty-six percent of companies on the Bovespa missed analysts’ earnings targets in the quarter. The Bovespa has slumped 7.8 percent this year, erasing last year’s 7.4 percent advance.
Analysts’ 45 percent mis-pricing on Brazilian stocks is 4 percentage points more than the gap in any other country. Russian analysts, off by 41 percent, were second worst while those in South Korea were third worst at 31 percent.
Much of the Brazilian analysts’ mistake stemmed from their misread on utilities, which plunged after Rousseff forced them in September to either cut power prices or relinquish the right to renew their concessions when they expire.
The voting stock of Eletrobras, as state-controlled Centrais Eletricas is known, plunged 61 percent over the past 12 months to 6.29 reais. Analysts at Itau’s brokerage unit had set a price target of 42.30 reais, marking the worst forecast on the stock. Itau BBA’s utilities analyst Marcos Severine declined to comment on his estimates for Eletrobras.
Finance Minister Guido Mantega said that analysts and investors didn’t pay attention to signals the government was giving them before it unveiled the new energy pricing policy.
“If some companies didn’t do the appropriate calculations, if some analysts were misled, that’s just tough,” Mantega said at a Nov. 23 speech in Sao Paulo. “Some analysts were doing estimates based on the assumption that concessions would be renewed with rates just as high as before, but that’d be a dream scenario” for the utilities, he said.
Severine cut his recommendation on the stock to the equivalent of sell from buy on Aug. 30 and said he might reduce his share estimate to as low as 13 reais, citing concern that Brazil could change rules for the sector when offering the companies the chance to renew concessions.
Energy Minister Edison Lobao had told reporters on July 26 that the government would demand energy rate cuts in order to renew the licenses. The analyst lowered the 12-month price estimate for the stock to 13 reais on Oct. 16, data compiled by Bloomberg show. He’s ranked by Bloomberg as the best analyst on the voting stock of Eletrobras based on his ratings for the shares. An investor who had followed his buy and sell recommendations over the past year would have gotten a return of 57 percent, according to data compiled by Bloomberg.
Rossi, the Sao Paulo-based homebuilder, has dropped 62 percent in the past year, the fourth-biggest drop on the Bovespa, to 3.66 reais after it posted its first annual loss in nine years. Barclays had the worst estimate on the stock, predicting a price of 21.52 reais. Brandon Ashcraft, a spokesman at Barclays, which closed its Brazilian equity research department earlier this year, declined to comment on the firm’s stock forecasts.
The selloff in Brazilian billionaire Eike Batista’s companies also caught analysts off-guard. OGX Petroleo & Gas Participacoes SA, Batista’s oil producer, has sunk 88 percent to 1.65 reais in the past 12 months after failing to meet output targets. The average analyst forecast was 23.29 reais.
Officials at OGX, Rossi and Eletrobras declined to comment on their share performance.
Analysts may have overestimated the boost that interest-rate reductions and Mantega’s tax cuts would give the economy, according to Fausto Gouveia, who helps manage 380 million reais at Sao Paulo-based Legan Administracao de Recursos.
Gross domestic product expanded 0.9 percent last year, the slowest pace since 2009. At the start of 2012, Mantega predicted the stimulus would help the economy expand 4.5 percent, while economists surveyed by the central bank forecast growth of 3.3 percent.
“Mantega fooled everyone,” Gouveia said in a phone interview from Sao Paulo. “And the additional measures taken throughout 2012 not only didn’t boost economic activity, but also pushed stocks lower.”
The central bank has held the benchmark rate at a record-low 7.25 percent since October even as inflation quickened to 6.3 percent, within 0.2 percentage point of the upper end of its target range. Mantega told lawmakers on March 21 that missing an economic forecast isn’t a “mortal sin” given that the world economy remains sluggish.
The Finance Ministry’s press office declined to comment further on Mantega’s forecasts and the Bovespa’s slump. The Presidential Palace’s press office didn’t respond to an e-mailed request for comment.
While Brazilian analysts’ stock forecasts were the worst in the world, this shouldn’t be seen as a reflection of their skill level because everyone was surprised that the economy didn’t pick up, said Michael Shaoul, chairman of New York-based Marketfield Asset Management.
“I wouldn’t have expected the analysts to see the deterioration,” Shaoul, who has had an underweight position on Brazilian stocks since mid-2011, said in a phone interview. “Everybody fell into the same trap.”
The Bovespa’s 7.5 percent plunge in the first quarter marks the worst start to a year since 1995 as economic data signal a pickup remains elusive. Industrial production contracted 2.5 percent in February from January, the most since Dec. 2008, while consumer confidence dropped for a sixth month in March.
“We’re at a patch where it’s hard to tell if the economy is going to accelerate or remain in the slow growth period we’ve seen in the last year,” Henderson’s Cowley said.“And that’s feeding through to analysts’ estimates, as companies are not meeting expectations.”