Is the bag cheap? Answer depends on the interest rate – 04/28/2023 – Market

A very common question asked by investors is whether a given asset is cheap or expensive. Even more recurrent is that this question is directed to the Ibovespa, the reference index in the Brazilian stock market.

The answer to this question may vary. But at this point, all analysts raise a common issue: the interest rate. For most market professionals, the perspective that the Selic could stay high for longer leads to the conclusion that the Ibovespa is unlikely to have an upward trajectory in the next 12 months.

Florian Bartunek, founder and Director of Investments at Constellation, says that the correlation between interest rates and the stock market is very high.

“We are with the CDI [taxa de referência do mercado muito próximo da Selic] at the highest level in 15 years and with the Exchange reaching the lowest levels in 15 years, when talking about multiples”, said Bartunek during a conference organized by Bradesco BBI, held in early April.

Multiples measure the stock price against earnings. The lower this ratio, the cheaper an asset is considered. Currently, the Ibovespa is cheaper than in 2008 or even at the worst moment of the pandemic, in 2020.

But these days, the market always reacts quickly to any statement by authorities about the interest rate, which is another important factor in determining how cheap the stock market is. The higher the Selic, the lower the attractiveness of the Exchange, due to the risk.

The president of the Central Bank, Roberto Campos Neto, said at an event in London on Friday (21) that the technical timing of the institution in the debate on the drop in interest rates is different from the political one. He also made a defense of maintaining the agency’s autonomy.

The speech was intended to respond to a speech at the same event the day before by the President of the Senate, Rodrigo Pacheco (PSD-MG), who incisively and in front of the President of the BC demanded an immediate reduction in the Selic rate, today in 13.75%.

Armed with graphs and giving technical reasons for the level of interest, Campos Neto said that the BC’s omission on the subject would be much more costly for society than the increase in rates to combat inflation.

Luis Moran, director of EQI Research, gives an idea of ​​how the Brazilian Stock Exchange could look, depending mainly on interest rates. “If the scenario improves, it could reach 170,000 points, which is the historic peak with correction. If things don’t move forward, especially with the new fiscal framework, it could go below 90,000 points, and it’s hard to know where it will stop” , he says. On Thursday (20), the Ibovespa closed at 104,366 points, accumulating a drop of almost 5% in 2023.

For Moran, the international environment that has been emerging is very positive for Brazil. “We have a situation of economic slowdown in the United States and Europe, and China in the opposite direction. This helps Brazil a lot. But it depends on our own decisions here”, says the director of EQI Research.

Companies show worsening

In the end, the performance of the Ibovespa basically depends on the results of the companies, and even more on the perspectives outlined for the numbers of the companies in the coming quarters. Therefore, the Ibovespa should be “sinking”, according to Max Mustrangi, founding partner of Excellance, which operates in the restructuring of companies and who has already served as an executive in several corporations.

“The fundamentals of companies do not explain the current level of the Ibovespa. If the fiscal situation does not improve, the relationship between risk and return in Brazil for foreign investors is no longer worthwhile”, says Mustrangi.

He claims that, if this scenario is confirmed, the real will lose value against the dollar, the Central Bank will be forced to keep interest rates high, companies will be more indebted, and results will get worse. “I bet on a fall in the short term. The Ibovespa depends on commodity companies, and the large consumer markets are not buying,” he says.

In a report on the balance sheets for the fourth quarter of 2022, XP Investimentos shows that, among the companies listed on the Ibovespa covered by the institution, there were more negative surprises than positive ones, when looking at Ebitda (earnings before interest, taxes, depreciation and amortizations).

Taking XP’s estimates into account, 47% of operating profits were below expectations, compared to 44% that came in better than expectations.

But, when taking into account the market consensus, which considers the projections of several analysis houses collected by Bloomberg, XP shows that 62% of the reported results were below expectations, and 33% were above.

Jennie Li, equity strategist at XP, says the rate of positive surprises was worse than the previous two quarters of 2022.

Even with the worsening results seen at the end of last year, XP is optimistic and in April revised its projection of a fair level for the Ibovespa in 2023, from 125 thousand points to 128 thousand points.

“There was a close revision of 5% upwards in the projections of companies’ profits in 2024 and 2025. This, combined with the falls in future interest rates since the maximums at the beginning of the year, brings greater optimism with the Ibovespa”, says Li.

Bartunek, from Constellation, claims that the stock market doesn’t need many triggers to go up. “Sometimes, everyone is cautious, and when you realize it, the market has moved 15%, 20%. The funds have money to invest and are little allocated on the stock exchange. Foreigners are crazy about investing in Brazil, for lack of options.”

He recalls that the Ibovespa is made up of large companies, generally leaders in their sectors, and that can even benefit from a crisis. “When you look, for example, at Raia Drogasil, it opens more pharmacies than all its competitors put together. These companies continue to grow even in difficult situations”, says Bartunek.

“I am much more convinced that companies like Lojas Renner, Localiza, Itaú, Bradesco, Ambev, Weg will be stronger in ten years than the other way around. It is much easier to know where these companies will be than where Brazil will be”, he says. the founder of Constellation.