Salient to Investors:
Brazilian equities saw the biggest outflows in the past two months since Lehman’s collapse in 2008. EPFR Global said emerging-market equity funds attracted $10 billion during the same period, while Mexican stock funds had inflows of $179 million. Brazil’s domestic stock funds had inflows of $2.5 billion so far in 2012 versus outflows of 1.3 billion reais for the same period last year.
The Bovespa’s P/E ratio is 19 versus 9 in September 2011, a 29 percent premium to the MSCI All-Country World Index, the largest in 9 years, and at a 39 percent premium to its 5-yr average of 14, and versus a P/E of 16 for the BSE India Sensitive Index, 11 P/E for the Shanghai Composite Index, and 5.8 P/E for Russia’s Micex Index. Brazilian equity valuations are higher than all the world’s biggest markets except for Japan and Switzerland, and greater than those of Russia, India and China for the first time since 2003. .
Valuations increased because profits fell at the fastest pace since 2002. Over 60 percent of companies in the Bovespa index reporting since October 1 have missed quarterly earnings analysts’ estimates, the biggest proportion in the world’s biggest markets after India’s Sensex. Q3 profits companies declined 19 percent versus a 1.9 percent increase in the MSCI All-Country index.
Phil Langham at RBC Emerging Markets Equity Fund is underweight Brazilian shares because government intervention clouds the earnings outlook for industries such as utilities, telecom and finance – interventionist government is unlikely to change. Nick Robinson at Aberdeen Asset Mgmt said there’s an increasing willingness by the government to become more involved in many companies. Geoffrey Dennis at Citigroup said government policy may help the economy, but is very confusing to foreign investors.
Gabriel Wallach at BNP Paribas Investment Partners said earnings in Brazil will rise as much as 25 percent in 2013 as record-low interest rates boost economic growth and raw-materials companies benefit from a recovery in Chinese demand.
Brazil’s central bank has cut interest rates by the most among the world’s 20 biggest economies. Economists predict growth will accelerate to 4 percent in 2013 versus 1.54 percent in 2012.
Carlos Firetti at Bradesco BBI says the apparent expensive multiples are caused by weak results, and with the economic recovery, earnings will rise 30 percent in 2013, led by companies tied to the local economy. Firetti said fiscal and monetary stimuli will strengthen the economy, a driver for stocks.
Rousseff’s efforts to increase Brazilians’ spending power have helped boost earnings at consumer-related companies.
Jonathan Garner at Morgan Stanley prefers China and Russia stocks because profitability has deteriorated significantly in Brazil compared to other emerging markets.
John-Paul Smith at Deutsche Bank said investors are much more wary of the impact of state intervention on equity returns – the big issue is the extent to which the state factor is priced in.