XP again raised its forecasts for the Ibovespa at the end of 2022, with a fair value of 130,000 points, or a potential rise of 18.70% compared to the previous day’s closing, compared to a previous projection of 120,000 points.
Strategists Fernando Ferreira and Jennie Li and strategy analyst Rebecca Nossig highlight, in a report, that the main reason behind the upward revision of fair value was the fall in real and nominal long-term interest rates, which fell between 1, 0 to 1.5 percentage points (pp) in the month of August.
In order to see greater potential in the Ibovespa fair value, the strategists point out that it would be necessary: 1) consensus earnings estimates to rise further, and/or 2) expansion of multiples, which could come from a continuation of the strong flow of external capital , as well as a reduction in local long-term interest rates.
“We continue to see the Brazilian stock exchange as attractive, trading at a P/E [múltiplo de preço sobre o lucro] of 6.2 times, 44% discount in relation to the historical average”, they pointed out.
When talking about the month of August, in which the Ibovespa rose by 6.16%, while international pairs were down, Ferreira, Jennie and Rebecca point out that Brazil continues to outperform global markets largely due to the levels of valuation are still quite attractive.
“Even when we take out the commodity companies, or just Petrobras PETR4 and Vale VALE3, the P/E goes to 10.4 times and 9.5 times, respectively – both lower than their own historical averages. And breaking the Ibovespa by sector, we see that all sectors in Brazil have their multiples traded below or close to the long-term averages”, they point out.
Not much room for growth actions
For the month, strategists point out that the rally was not driven by commodities or banks, but by a strong rally in growth stocks and other names that had been under heavy pressure for months.
They reinforce that, recently, there have been signs of a slowdown in inflation, with negative monthly rates driven by the readjustment of fuel prices and the reduction in the collection of some items such as energy and fuel, in addition to indications that the end of the cycle of high interest rates in Brazil is closer. “As a result, long-term rates have sharply corrected over the last month. This change in the behavior of the yield curve impacts the sectors that are more sensitive to the interest rate – growth companies, as these have most of their value in the future”, they explain.
Thus, they point out, the growth factor has finally started to recover in the last two months. “After being severely punished since the beginning of the year with high interest rates, we are finally seeing a reversal of the negative performance, the growth factor was the best in the month of August”.
With the growth factor rebounding, strategists reckon that some may see some opportunities to take on more risk. However, they warn that there may not be room for the rate to continue to fall further, bearing in mind that there is still the possibility that fiscal and political risks will increase with elections approaching.
“As such, we are not adding much exposure to the growth sector at the moment,” they point out.
So in terms of factors, the house’s focus remains on quality, low risk, and some value names. “Our main themes remain: 1) commodities, 2) secular growth stories, and 3) quality at a reasonable price.”
In commodities, strategists remain bullish on energy, shunning metals due to the sector’s sensitivity to global economic activity, which is showing signs of weakening. “Our preference is for the Oil & Gas sector for exposure to commodities due to structural imbalances in supply and demand and discounted valuation, with our main choices for the sector being Petrobras (PETR4) and 3R (RRRP3)”, they assess.
Meanwhile, secular growth stories are companies that must remain resilient amid a deteriorating macro outlook. Some of the main names that show good growth prospects and that strategists like are Assaí (ASAI3) and Grupo Soma (SOMA3).
Finally, in Quality at Reasonable Price, strategists like resilient names amid a still uncertain macro scenario, showing a solid track record [histórico].
In this segment, they highlight Iguatemi (IGTI11) and Banco do Brasil (BBAS3). Regarding the bank, strategists say they like the name, but preferred to remove some exposure to state-owned companies for the moment to protect us against short-term political risks that could arise in the coming months. Even so, BBAS3 remains the top pick in the financial sector along with Itaú (ITUB4).
In the top 10 portfolio for September, strategists made the following changes: 1) removed Localiza (RENT3) and added Rumo (RAIL3); 2) they excluded TIM (TIMS3) and included Grupo Soma (SOMA3); 3) they reduced the weight of BB to 5% and increased that of Itaú to 15%, followed by a weight of 20% for shares in the financial sector and 4) decreased the weight of Vale to 5% and increased that of Raízen (RAIZ4) to 10%.
The complete portfolio is highlighted below:
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