Ibovespa may have year of earnings, despite volatility - Valor International

While metrics show that Brazilian stock prices are at historically low levels, the scenario for 2022 is challenging: interest rates are likely to remain high; inflation may remain above the Central Bank's target; growth is expected to be low, and there will still be the uncertainties characteristic of an election year.

Therefore, banks and brokers consulted by Valor expect, on average, that benchmark stock index Ibovespa will end next year at 124,500 points, which would represent an increase of around 18.7% for local shares compared to the 104,822 points of the last trading session of 2021.

The projections of 19 financial institutions consulted ranged from 112,000 points, in the most pessimistic one (up 6.84%), to 138,000 points, in the most optimistic, which would represent an annual gain of 31.65% for the Ibovespa.

After reaching record highs in June 2021, at 130,000 points, it had entered a negative spiral, pressured by political noise and uncertainties related to fiscal issues in the country. Even so, corporate results remained healthy throughout 2021, which pushed several Ibovespa valuation metrics to levels not seen in many years.

The price-to-earnings ratio of the companies that make up the Ibovespa is close to 7.6 times, almost 30% below the levels of the last 15 years, 11.2 times. Even when the main commodity companies that make up the indicator are removed from the calculation — Petrobras and Vale — the Ibovespa is traded at 10.3 times, also below the historical average of 12.7 times.

“Although 2022 should undeniably be a more volatile year, given the current valuation levels, we see room for local shares to perform well”, say Carlos Sequeira and Osni Carfi, with BTG Pactual. They emphasize their projections seem optimistic when compared to the current situation in the country, but that they seem viable if Brazil “gets back on track”.

“We assume that the Central Bank will bring inflation back to target in the long run, that long-term real interest rates will go back to 4%, and that long-term real GDP growth will be 2%. As a result, the fair multiple of Ibovespa's price-to-earnings ratio is 12.7 times, in line with its historical average (except Petrobras and Vale). So, using our profit estimates for 2022, the Ibovespa should end the year at 132,000 points.”

Órama's chief economist Alexandre Espírito Santo have a similar view. For him, Brazilian shares seem discounted in relation to global peers. “We are trading with a price-to-earnings ratio of 7 times, while the S&P 500 trades above 40 times. As we believe that part of the 2022 stress may have been anticipated, thinking about going back to trading with 10 times is not unreasonable,” he says.

Bank of America (BofA) estimates that the Ibovespa ends 2022 at 125,000 points. According to David Beker, head of Brazilian economy and Latin America strategy at the institution, the forecast is conservative, as it does not include an expansion of multiples in the local stock exchange and is based on the expectation that a good part of the index's appreciation will take place via improved corporate results.

A risk to be monitored, according to Mr. Beker, is the continuity of migration of variable income flows towards fixed income in the country. “When we look at the year to date, we still see a balance of entry into equity funds. Considering the volumes of resources that entered variable income in recent years, the outflows are very small and the process is still very timid. The risk here is to continue having exits.” Even so, there is a certain level of comfort with the BofA recommendation of “exposure in line with the market average” due to the level of prices.

Daycoval Asset's variable income manager, Anand Kishore, believes the risk-reward ratio on the stock market is still not very attractive, as interest rates for a year's time are currently around 12%, a level close to the 13.5% of appreciation he expects in Ibovespa, which, in his view, should end 2022 at 122,200 points.

However, for him, the scenario should still be very dependent on politics and the reaction of financial agents to the candidates' proposals. “If the electoral scenario turns out to be less radical and more favorable, investors can start anticipating 2023 and, in this case, the fair price would be much higher than the 122,000 points we have today”, he says.

An XP report on the subject shows that it is difficult to define a performance standard for the stock exchange in election years. “In 2002, Brazilian stocks fell nearly 30% in the six months before the polls that year and rose 27% during the following semester. However, in 2014, the returns were positive before and after the elections,” says Fernando Ferreira, Jennie Li and Rebecca Nossig.

On average, the Ibovespa had, since 2002, a negative return of 6.7% in the semester prior to the election, recording an appreciation of 5.9% in the following six months. In terms of volatility, the market fluctuated more, in 2002 and 2006, as the electoral period approached and, later, calmed down. However, in 2014, volatility increased even after the results were released.

“We are entering 2022 with expectations at very low levels, unlike what happened in 2021, when there were a number of possible positive catalysts. Now, the market is waiting and has already priced political, economic, monetary problems... It is possible that we will have a year with a lot of volatility, but not necessarily downwards”, says Mr. Ferreira, chief strategist at XP.

Thus, XP has a triple projection for the main national index: 93,000 points at the end of 2022 in a cautious scenario; 123,000 points as a base, “reflecting almost nothing of improvement in the environment”; and 143,000 points in the most optimistic view, projecting a possible drop in interest rates in the second half of the year and an improvement in the performance of listed companies.

Responsible for the most optimistic projection among those collected by Valor, pointing to 138,000 points in December 2022, Andbank has a similar speech in terms of prior pricing of negative triggers, also seeing possible positive stimuli to boost the index in the period.

“We still have local and global issues, but we also see some issues getting out of the way. The water crisis is showing signs of retreat, the second yearly crop will be productive, inflation may have reached its highest point. If the environment continues to improve, it will make room for progress,” says Fernando Bresciani, an investment analyst with Andbank Brasil.

As for Goldman Sachs' Latin American equity strategy team, the risk premium for Brazilian equities is currently consistent with an environment of 0.9% GDP growth next year. In this context, the expectation is that the Ibovespa may appreciate in the short term and even exceed the institution's target price for the end of 2022, of 116,000 points.