BTG, Quantitas Say Ibovespa at Decade Low Has Further to Fall

  • Ibovespa's trading at lowest level since 2005 in dollars
  • Political crisis, recession may deepen rout, BTG analyst says

A rout in Brazil stocks has sent the Ibovespa to the lowest in a decade. That’s still too high for some investors.

BTG Pactual SA and Quantitas Asset Management say political gridlock and the worst recession in more than a century threaten to deepen a selloff that has already sent the Ibovespa tumbling more than 9 percent in dollar terms in the first few days of the year. It follows five straight years of losses that wiped out 70 percent of the benchmark stock index’s value.

For many investors, there’s just no compelling reason to buy stocks from Latin America’s biggest economy. Interest rates are rising, inflation is at a 12-year high, industrial production has tumbled for 21 straight months and exports haven’t picked up even after the real lost a third of its value last year. Add to that a sweeping corruption scandal that’s paralyzed Brazil’s capital and distracted lawmakers from focusing on getting the economy back on track.

"It’s a discouraging truth, but it’s the truth," Wagner Salaverry, a partner at Quantitas,  which oversees 22 billion reais ($5.5 billion), said from Porto Alegre. "The risks of a worsening economic scenario aren’t fully priced in yet. If the government doesn’t do an adjustment to the economy, it’s hard to say stocks will be a good investment. The market won’t pay in advance, hoping for a change."

The Ibovespa dropped 0.4 percent to 39,364.90 at 2:25 p.m., the lowest level since March 2009. In dollar terms, the gauge is at the lowest level since 2005. Stocks are trading at 9.4 times their 12-month estimated earnings, 15 percent below their three-year average.

The recession is likely to hurt growth in corporate earnings this year, according to BTG. The bank estimates earnings will expand 6.5 percent for companies that rely on domestic demand, in line with inflation. Lower commodity prices should limit improvements for exporters, the bank said.

"Is Brazil cheap? Not really," analysts led by Carlos Sequeira wrote in the bank’s 2016 Brazil equity strategy outlook report. "Expected earnings have been constantly revised downwards, and visibility is poor," justifying below-average valuations, the analysts wrote.

Foreign investors seem to agree. They pulled a net 4.3 billion reais from Brazilian stocks in December, the worst month since at least 2010, according to data compiled by the exchange. The move continued into 2016, with a net outflow of about 820 million reais in the first week of January.

The political crisis is fueling much of the negative sentiment among investors. President Dilma Rousseff is fighting attempts to impeach her on allegations she mismanaged the country’s budget, making it harder to gain support for reforms needed to shore up the nation’s finances. Joaquim Levy, who took over as finance minister in 2015 with the goal of fixing the country’s finances and avoiding a sovereign downgrade, left after just one year on the job. His replacement, Nelson Barbosa, is trying to overcome skepticism that he’ll fare better at turning around the now junk-rated country.

“We see a very inappropriate economic policy, internal political risks, turbulence, little conviction about the adjustments and even at these levels it’s not attractive to us in valuation terms," Jorge Unda, who oversees about $35 billion as chief Latin America investment officer for Banco Bilbao Vizcaya Argentaria SA, said from Mexico City. “We continue to be negative on Brazil in general across markets -- in stocks, bonds and the real. We don’t like it."

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