Photographer: Jessica Nolte/Bloomberg
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Record Brazilian Results to Extend Performance, BlackRock Says

Brazil’s growing economy, lower interest rates and leaner companies are leading investors to believe there is more upside for the Ibovespa -- even after a record number of the companies beat fourth-quarter earnings estimates.

Sixty percent of the companies on the benchmark index that have released results reported better-than-expected sales, according to Bloomberg data. And at least 16 of the 64 groups that comprise the index had record quarterly revenue, signaling the worst may be behind in Latin America’s largest economy. The good news should keep flowing, investors say.

“The companies did whatever they could to be more cost-effective during the recession and therefore have super-efficient margins,” William Landers, a managing director at BlackRock Inc., said in an interview in Sao Paulo. “Any top line growth will be accretive to margins. You also have a benchmark interest rate that is less than half of what it was last year. If that doesn’t lead to earnings growth, I don’t know what will.”

Leading Indicator

Brazil's main stock index has outperformed other major market gauges year to date

Source: Bloomberg data

As of midday Tuesday in local currencies

The Ibovespa, which is near a record level in local currency, is still 40 percent below its peak in dollar terms, which may mean it still has room to rise. Foreign investors have hesitated to return to Brazil ahead of the October presidential election, which could result in positive inflows after the fact.

“A place where you still haven’t had a lot of positive flow, with strong earnings momentum and where local investors will migrate to stocks out of need is positive for a few years, not just a few months,” said Landers, who has $2.5 billion under management.

About 66 percent of Landers’s portfolio is allocated in Brazil. His most recent move was to increase exposure to consumer discretionary stocks, including retail and e-commerce companies.

Santander analysts have raised their Ibovespa year-end target to 97,000, a 15 percent upside from the current level. The Ibovespa is up 10 percent year-to-date in local currency and U.S. dollar terms, compared with 1.7 percent for the S&P 500 and 6.8 percent for the Nasdaq composite.

The lingering question is whether the winner of the presidential election will maintain structural reforms that President Michel Temer has fought for, Landers said. There’s no clear front-runner, assuming former President Luiz Inacio Lula da Silva is unable to run, as expected.

“Brazil’s recovery is as good as, maybe even better than we expected,” he said. “The big mystery now is who will be the next president.”

— With assistance by Eduardo Thomson, and Ricardo Strulovici Wolfrid

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