Interest rate drop makes room for stock market hike – 07/02/2023 – Market

The prospect of the imminent start of the BC (Central Bank) interest rate cut cycle in August, or at the latest in September, has injected courage into investors regarding the potential positive performance of stocks on the Stock Exchange in the coming months.

The approval by the CMN (National Monetary Council) of the new inflation target regime further reinforced the expectations of financial agents regarding the reduction of the Selic rate in the short term. Future interest rates, which include market bets on the conduct of monetary policy, fell sharply on Friday (30).

The projections of banks and brokerages for the Ibovespa, the main stock index of the B3, vary between 125 thousand and 140 thousand points for the next six to 12 months, which embodies an appreciation potential of almost 20% in the case of estimates more optimistic.

Incorporating the improvement in the macroeconomic scenario since the beginning of the year, in the first semester, the Ibovespa appreciated by 7.6%, to 118,087 points. Which does not mean that the upside potential has run out.

Santander released on Monday (26) a projection that predicts the Ibovespa to reach 140,000 points in June 2024, which corresponds to an appreciation of 18.5% in 12 months.

“We have a very positive outlook. [para a Bolsa] over the next 12 to 18 months. We are at the beginning of a ‘bull market’ [ciclo de forte alta das ações] in Brazil,” says Aline Cardoso, head of research and stock strategy at Santander.

The likely drop in interest rates is one of the main factors behind Santander’s positive outlook for the stock market. The bank conducted a study that sought to analyze the behavior of the Stock Exchange in the last nine interest rate cut cycles, between 1999 and 2020.

The work indicated that, 12 months after the first cut, the Stock Exchange rose, on average, 21%. And that, after 24 months, the average high of the shares rises to 43%. “Cycles of interest rate cuts are very powerful for the stock market’s performance”, says the specialist.

Lower interest rates are reflected in a lower cost of capital for companies to run their operations, with a drop in financial expenses to meet interest payments, and a likely upward revision in earnings growth, says Aline.

RB Investimentos strategist, Gustavo Cruz adds that the lower Selic reduces the attractiveness of fixed income issuances for individual investors, who, with this, tend to direct their attention back to higher risk assets that embody a greater expectation of profitability like stocks.

Cruz increased the projection for the Ibovespa at the end of 2023 from 120,000 to 125,000 points at the end of June, which represents an appreciation of 5.85%. “Some uncertainties left the front, giving more space for the appreciation of risk assets”, he says.

He points to the progress of the fiscal framework in Congress as an important positive signal for the market regarding the conduct of economic policy by the Lula government. “The framework does not solve the fiscal problem, but it goes in the right direction and does not worsen the situation in Brazil in the coming years”, he says.

The strategist adds that the approval by the CMN of the new inflation target also positively impacts the sentiment of financial agents. “The decision leaves the way open for the BC to have autonomy to pursue the goal.”

In mid-May, XP had also increased the projection for the Ibovespa in December from 128,000 to 130,000 points, which corresponds to an increase of 10.1%.

The drop in future interest rates in recent weeks was pointed out by XP analysts to justify the upward revision in the estimate for the stock index.

XP’s expectation is that the BC will start cutting interest rates in August, with the Selic at 12% at the end of 2023 and at 11% in June 2024.

“Looking to the future, we think we may be facing a more favorable cycle for Brazilian assets in view of this perspective of falling interest rates”, say XP analysts in a report.

“Small caps” and cyclical sectors are considered among the best bets on the Stock Exchange

Stocks known in the market as “small caps”, of smaller companies, which tend to have a greater relationship with the domestic economy, are mentioned by XP analysts among those that should have an outstanding performance compared to their peers.

Cyclical sectors that are more sensitive to fluctuations in interest rates, such as pulp and paper, retail and transport are also mentioned among those that should present an above-average performance.

Aline, from Santander, cites the discretionary consumption sector, which is the one most influenced by economic cycles, among the bank’s main bets for the Stock Exchange. In this sense, retail and civil construction companies are potential candidates, says the specialist.

In Santander Corretora’s recommended July portfolio, representatives of both sectors, such as Hypera, Vivara, Multiplan and Cyrela, make up the suggested stock portfolio.

Guide revises forecast down on frustration over falling rates

On June 26, Guide Investimentos revised downwards the projection for the Ibovespa in December, from 150,000 to 140,000 points.

According to Fernando Siqueira, head of the research area at Guide, despite the expectation of a fall in interest rates favoring the appreciation of the Ibovespa, the previous estimate incorporated a fall in the Selic as of the second quarter, which did not occur.

In addition, the drop in commodities, both iron ore and oil, the two most relevant for the Brazilian stock exchange, was more pronounced than expected, adds Siqueira.

“Despite the reduction in the projection, we still see a high appreciation potential for the Ibovespa throughout 2023”, points out the expert. He also says that, despite the weak performance of the Brazilian economy in recent quarters, the profit of companies on the Ibovespa has been growing
consistently.

“The drop in interest rates has historically boosted Brazilian assets, mainly stocks and real estate funds. We believe that in this cycle history will repeat itself and the drop in the Selic rate should contribute to bringing back the flow to assets with greater potential for appreciation, such as stocks and real estate funds.”