Not all the stars in the market are always aligned. Even though there is a strong correlation between Brazil and international markets, there are times when we see an improvement in domestic news, but a worsening in international news, and vice versa, leading to different performances between the various sectors of the Brazilian Stock Exchange. On the other hand, at times these stars can align for both the “good and bad” of the market, causing the propensity or aversion to risk to gain even more intensity.
With this in mind, the Itaú BBA strategy team highlighted four scenarios combining these possible movements, defining which are the favorite actions in each of them.
“We have developed a score-based analysis to classify stocks under our coverage, with the aim of assessing their sensitivity across four different risk scales, namely Global RiskOn (risk appetite on the global stage), Global Risk Off (risk aversion in the global scenario), Brazil Macro Risk On (risk appetite in Brazil) and Brazil Macro Risk Off (risk aversion in Brazil)”, says the team.
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Although the BBA does not outline what would be a positive scenario abroad, factors that would allow this, according to a general view of the market, are a reduction in geopolitical risks, a macroeconomic scenario in the USA that allows the Federal Reserve to begin its cycle of interest rate cuts, among others.
Here, the market has been following, mainly, the fiscal situation. A positive vision for Brazil, at this moment, involves balancing public accounts.
In first placethe Brazilian bank’s strategy team, headed by Daniel Gewehr, designs the possibility of a double “bull market”with both the external and internal scenarios being driving forces for the market.
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In this case, the BBA sees more opportunities to invest in state-owned companies, domestic cyclical companies, sensitive to long rates and small caps. In the case of state-owned companies, a lower risk in Brazil would also result in a lower risk of interference, for example. Cyclical companies and small caps are, naturally, benefited by a decline in interest rates.
Examples of preferences in this scenario are Azul (AZUL4), Simpar (SIMH3), Ecorodovias (ECOR3) and Vamos (VAMO3).
O second scenarioin risk off in the world and on in Brazil, the BBA now gives preference to quality shares, with lower leverage – or in the process of deleveraging. Nubank (NUBR33), Mercado Livre (MELI34) and Hapvida (HAPV3) are some of the choices in this configuration.
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If the movement is the opposite, in third place, with risk on in the world – with the Fed starting its rate cutting cycle, for example -, and Off in Brazil, Itaú’s vision is that the companies that would benefit most would be those large caps. These larger companies are normally the ones most sought after by foreign investors who arrive with capital in Brazil.
Furthermore, companies more exposed to the exchange rate, such as commodity exporters, would also benefit, gaining higher margins (selling in dollars and producing in reais). A scenario of risk on in the world and Off in Brazil it generally leads to a devaluation of the local currency.
The favorite shares cited by BBA in this scenario are Banco do Brasil (BBAS3), São Martinho (SMTO3), Klabin (KLBN11) and PRIO (PRIO3).
Lastly, in fourth scenarioif investors stay risk averse both in Brazil and abroad, the BBA assesses that it would also maintain its preference for shares exposed to the exchange rate, large caps and secular growth, non-cyclical consumption. In this case, names like CPFL (CPFE3), Vale (VALE3) and Neoenergia (NEOE3) are on the list.
“Our recommended portfolio in Brazil currently appears to be balanced between the scenarios, with a slight inclination towards risk off”, they point out. In its latest Brazil Buy List portfolio, the bank had exposure to the shares of Banco do Brasil (BBAS3), Arezzo (ARZZ3), Hypera (HYPE3), PRIO (PRIO3), Suzano (SUZB3), GPS (GGPS3), Localiza (RENT3 ), Randon (RAPT4), Equatorial (EQTL3) and Sabesp (SBSP3).
