Why does the US stock market rise and the Ibovespa not? – 05/28/2023 – From Grain to Grain

You’ve probably heard from several specialists that the Ibovespa would be cheap and the American stock market expensive. So why do we continue to see the US stock market appreciate in 2023 and the Ibovespa underperforming?

While the S&P500 appreciates 9.5% in the year, the Ibovespa, after rising 6.2% in May, gains only 1.1% in 2023.

At first glance, it seems strange that the US stock with a Price/Earnings (P/E) multiple of 19, which is higher than its long-term average of 18.5, appreciates more. The chart below shows the evolution of this multiple for the S&P500 since the 1990s.

The Brazilian case is just the opposite. The Ibovespa has a P/E multiple of 7, which is lower than its long-term average.

Even though it seems cheaper, the main Brazilian stock index loses badly to the American one in the year.

However, the worst variation of the Ibovespa is not as far removed from the US market as the aggregate indicator indicates. The problem is the composition.

First, let’s understand the composition of the two indices and its effects on the multiples. Then let’s compare more appropriately.

When we look at an index, we often forget that it is a composition of several different companies and sectors. Each index has different sectoral concentrations.

For example, around 60% of the Ibovespa is made up of companies from the commodities and financial. On the S&P500, that number is just under 20%.

This concentration in the commodities and financial performance of the Ibovespa has been growing over the last few years.

It is recognized that companies commodities, at the end of the cycle, trade with very low multiples. Additionally, the low growth perspective of the financial sector results in low multiples. This explains the low P/E multiple of the Ibovespa.

These two factors only leverage the effect of high interest rates and low growth prospects in Brazil on multiples.

Remember, the higher the interest rate and the lower the growth, the lower the associated fair P/E multiple.

An opposite effect occurred with the S&P500. The weight of technology companies today is greater than in the past. These companies have higher multiples, as they have greater growth prospects.

I’m not saying that one market is expensive and the other cheap. But, just alerting you to be careful when comparing the current multiple with the past. This may not be very appropriate when there are structural changes like the ones that have taken place.

Now let’s understand how the sectors with the greatest weight on the Ibovespa, that is, commodities and financial, behave in the US.

While the S&P500 financial companies index falls -6.47% this year, the financial companies index commodities of the S&P500 depreciates -0.87% in 2023.

Evaluating in isolation what is happening with the actions of the financial and commodities from the S&P500, it is possible to notice that the performance of the Ibovespa is in fact not so far removed from its American pair.

Ibovespa does not have relevant participation of companies in the technology sector. And it is this sector that drives the rise of the American index, appreciating 34.97% in 2023.

Let’s see how the second largest sector in the S&P500 behaves, which is the health sector. This sector also has a negative average performance of -5.08% in the year.

Therefore, be careful when evaluating that the performance of the Brazilian market is detached from the American one. In fact, the performance of the Ibovespa is well explained by the low results of similar companies in the US market.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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