Analysis - Lowest Brazil rates unlikely to jump-start Bovespa
SAO PAULO |
SAO PAULO (Reuters) - Brazil's record-low interest rates are unlikely to kick-start the local stock market as they did in the aftermath of the 2008 global financial crisis - another sign that the government's heavy-handed economic policies are losing their punch.
An inverse relation between rate trends and the price-to-earnings ratio, a gauge of earnings expectations, was broken this year for the first time since 2006, according to Thomson Reuters data. Some investors say this means that local stocks will fail to benefit from central bank efforts to slash borrowing costs, at least in the short term.
Steep downward earnings revisions and worries over growing government meddling in the private sector have made investors more cautious about Brazilian stocks, even as they look increasingly cheap. Appetite has also been hurt by some European countries' escalating debt woes.
"The perception is that Brazil is heading into a difficult situation in the short term, and that not even low rates will bring about a turning point for equities," said George Sanders, who helps manage 400 million reais (127 million pounds) in assets for Infinity Asset Management in São Paulo.
The situation underscores some of the policy risks in Latin America's largest country, where a strong government hand in the economy has ignited fears of a credit bubble and fostered a perceived loss of autonomy at the central bank. Some investors also worry that the government's focus on economic growth is undermining Brazil's inflation-targeting regime.
Since taking office last year, President Dilma Rousseff has made spurring annual GDP growth of above 4 percent her top priority. But for investors, such a goal risks eroding some of the economic stability that made Brazil a market darling under her predecessor and political mentor, Luiz Inacio Lula da Silva.
The central bank slashed the benchmark overnight Selic rate to a record low of 8.5 percent late last month, and policymakers have signaled that more reductions will take place "sparingly," despite some signs that inflation may soon stage a comeback.
Her efforts have so far failed to prevent analysts from slashing earnings and economic growth forecasts this year. Investors are especially worried about government pressure on Brazil's biggest private company, Vale (VALE5.SA), to invest more in steel, and on banks to charge lower interest rates.
Rousseff's stance has led investors to demand bigger premiums to own Brazilian equities. In May alone, $1.2 billion in investor money left the domestic equity market.
"Brazil has great policy options, but the government should make better use of them," Sanders said.
Moreover, many investors say that Brazil has become a difficult place to do business, which could be hampering its ability to lure and retain foreign equity investors.
According to the World Bank's Doing Business survey last year, Brazil ranked 126th among 183 countries in terms of deal-making conditions. Brazil had ranked 120th in the 2010 survey.
RISK PERCEPTION WORSENS
Unlike in 2008, when massive fiscal stimulus and aggressive rate cuts helped Brazil's Bovespa stock index .BVSP soar 83 percent in 2009, investors believe that this time any stock rally will be short-lived. At the time, the central bank slashed the benchmark interest rate to a then-record low of 8.75 percent.
The Bovespa is down 4.2 percent this year, on top of an 18 percent tumble in 2011.
The last time the Bovespa had back-to-back yearly declines was between 2000 and 2002, when it shed a combined 38 percent. While analysts acknowledge that the correction seen over the past 18 months is making the Bovespa look cheap, foreign investors fail to see an attractive entry point at the moment.
"For a re-rating in equities, we believe investors may need greater confidence in the bottoming and potential reacceleration in earnings growth later in the year," Credit Suisse Group strategist Andrew Campbell said in a recent report.
The number of downward earnings revisions climbed to 275 in May from 196 in December, while the number of upward revisions rose to 198 from 133 in that period, Thomson Reuters I/B/E/S data showed. Economists have cut their 2012 economic growth estimates to 2.53 percent as of last week, from 3.4 percent in January, a weekly central bank survey found.
Earnings-per-share estimates fell an average 7 percent since January, Campbell added, with the bulk of the reductions focused in the heavily weighted mining, energy and real estate sectors.
"Persistent downward earnings revisions and a less favorable investment environment are the main reasons why lower rates alone are not enough to drive a re-rating in the Brazilian market," Campbell wrote.
Carlos Sequeira, head of equity strategy at BTG Pactual, expects about half of consolidated earnings estimates for the 68 stocks comprising the Bovespa to be revised downward soon.
Yet stocks have rarely looked so attractive compared with local bonds. The difference between bond and dividend yields, a gauge of relative returns between both asset classes, posted negative readings between March and May this year, which had not happened since early 2009, Thomson Reuters data showed.
The Bovespa is now trading at 9.3 times estimated 12-month earnings, which looks cheap compared with the S&P 500 .SPX, which trades at about 12 times projected earnings, according to Thomson Reuters data.
Brazil's stock index, whose component stocks are heavily dependent on commodity prices, is especially susceptible to hiccups in the global economy. That means that low stock prices and falling interest rates are not the only consideration when looking at the Bovespa.
"We acknowledge that in the short term, a more predictable global scenario, and thus less risk aversion, is a necessary condition for the better performance of Brazilian stocks," BTG Pactual's Sequeira said.
According to Frederick Searby, a strategist with Deutsche Bank Securities in New York, Brazil is in some ways in a relatively resilient position but remains vulnerable to a reversal in foreign investment inflows into bonds and stocks.
Of Latin America's five largest equity indexes, Searby identified Brazil's as the most vulnerable to a downturn in China and to a decline in commodities prices.
(Additional reporting by Asher Levine; Editing by Todd Benson and Matthew Lewis)
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