Central banks around the world have been slashing key interest rates in an effort to stimulate borrowing and jump-start local economies mired in malaise. In Brazil the positive effects of low rates have been twofold: Lending is up, and so is equity investment, as many Brazilians move money out of previously high-paying fixed-income instruments and into stocks for the first time. Brazils central bank has cut its benchmark Selic rate five times this year, to a record-low 8.75 percent; the Selic started the year at 13.75 percent.
With fixed-income investments returning far less than investors are accustomed to receiving, many formerly equity-shy Brazilians are now willing to take a chance on stocks, according to Carlos Constantini, head of research and chief equity strategist at Itaú Securities in São Paulo. He notes that individuals account for 34 percent of the trading volume on Brazils stock exchange, the Bolsa de Valores, Mercadorias e Futuros Bovespa, up from 25 percent in 2005.
Its a brave new world, says Constantini, and research departments covering Brazilian equities have had to adapt to investors who are more speculative and trading-oriented than many of their institutional counterparts. Theyre looking for shorter-term trades and are more willing to trade the less-liquid stocks, and usually the gain doesnt have to be so high, he explains. Theyre happy to take their profits and look for the next opportunity.
There has been no shortage of opportunities for profit-taking in Brazil this year. The BM&F Bovespa index surged 45.8 percent year-to-date through July, and many economists and equity strategists believe that the nation is in the early stages of a bull market.
In addition to local investors pouring money into the stock market, foreign investors are bargain hunting in Brazilian equities after last years market rout; July was the fifth straight month of foreign net inflows, according to BM&F Bovespa. This flood of interest is causing a surge in demand for research. The analysts who provide the best insights into Brazils booming stock market can be found at UBS Pactual, according to the 2009 All-Brazil Research Team, Institutional Investors sixth annual ranking of the nations leading equity analysts. The UBS Pactual team is in first place for a fourth year running; the firm captures 11 total team positions, down from 13 last year, and is apparently in the winners circle for the last time at least under its current name. In April the Swiss bank announced it would sell its Brazilian operations to BTG Investments, a São Paulobased asset management firm launched last year by André Esteves, former global head of fixed income at UBS. The deal is expected to close later this year.
Nipping at UBS Pactuals heels, with ten positions each, are Banc of America SecuritiesMerrill Lynch vaulting all the way from fifth place after picking up seven positions and Itaú Securities, jumping from No. 4 after gaining five. Last years second-place firm, Credit Suisse, falls to fourth, with nine positions (down from 11). Rounding out the top five is Santander, dropping from third place. The Spanish bank wins seven positions, one more than last year.
Marcelo Audi, Santanders São Paulobased head of Brazilian equity research, says low interest rates are having a positive impact on the nations financial institutions, which were pummeled in the economic meltdown despite being structurally sound and well capitalized. Regulations preclude Brazilian banks from leveraging their assets to the extent that proved so damaging to U.S. and European institutions, but skittish investors apparently deemed them guilty by association and dumped their shares last year. All that is changing now, notes Audi, who captures the top spot in Equity Strategy for the first time.
We see clear signs that the credit cycle is about to embark on a new expansion phase, which is likely to increase the momentum for financial institutions, he says. In a July research note, Audi told clients that the country is entering another long-lasting consumer spending cycle, which we view as the key driver to pull Brazils real gross domestic product growth to 3.5 percent in 2010 from 0 percent in 2009. He urged them to overweight bank stocks, among others. Our main investment theme in 2009 and into 2010 and 2011 is the domestic cyclical sectors mainly, financial institutions, retail, real estate and industrials, he explains.
Audi, 42, is a 1988 graduate of Fundação Getulio Vargas, São Paulo, with a bachelors degree in business administration. Before joining Santander in January 2007, he worked as a Brazilian equity strategist at Merrill Lynch, a utilities analyst at Banco Patrimônio and an investment analyst at Quadrante Investimentos, a money management firm headquartered in São Paulo.
Another analyst making his first appearance at No. 1, Alcir Freitas of Itaú Securities, is far less sanguine on the banking sector. The São Paulobased researcher joined Itaú as a Banking & Financial Services analyst in May 2007, after 12 years covering the sector for BankBoston Brazil, Santander and Banco BBA Creditanstalt. He earned a bachelors degree in business administration from the Pontifícia Universidade Católica de São Paulo in 1996.
I was bearish, but now Im just cautious on Brazils banks, says Freitas, 36, because single-digit interest rates are going to squeeze margins. Since January he has maintained a neutral stance on banks, with the exception of Banco Bradesco, which he downgraded to underperform in March because of what he views as an ill-timed expansion strategy. Its costs are increasing more than the market average, and thats why I see it suffering a little bit more than other players, says the São Paulobased analyst. Bradescos stock has trailed the broad market by 5.8 percentage points since the downgrade, through July.
Freitas has been steering clients toward insurance companies instead of banks. In March he upgraded SulAmérica to overweight, at 19.30 reais, because of the diversified insurers high exposure to the health care segment, making it virtually recession-proof. By July 31 the stock had shot up a healthy 68.5 percent, to R32.52, outpacing the broad market by 32.1 percentage points.
Another seemingly recession-proof sector is real estate, especially with regard to developers of low-income housing. Theres a lot of pent-up demand because its a segment thats been completely ignored by the banks and other homebuilders, explains Gordon Lee of UBS Pactual, who captures first-place honors for the first time in Real Estate, leapfrogging all the way up from runner-up last year. Lee, 36, a native of Mexico who earned a bachelors degree in economics from the University of Pennsylvania in 1994, got his start as an analyst covering construction for Barings in Mexico. He joined UBS in 2003 after stints as a real estate analyst at Goldman, Sachs & Co. and Deutsche Bank Securities.
The New Yorkbased analyst has been a longtime advocate of Rio de Janeirobased PDG Realty Empreendimentos e Participações. He first recommended the developers shares back in April 2007 and has reiterated the recommendation repeatedly since, most recently in January. This year through July the stock was up a whopping 137.7 percent.
Debuting atop the Agribusiness sector, which was added this year to the All-Brazil Research Team, is Luiz Otávio Campos of Credit Suisse. Campos, 30, joined the Swiss bank as a utilities analyst in 2002 after earning a bachelors degree in electrical engineering from the University of São Paulo. He has been covering Brazilian agribusiness since 2004, along with the education and transportation sectors. Hes a very busy guy, quips Emerson Leite, the firms head of Latin American equity research.
In June, Campos downgraded his long-standing top pick, SLC Agrícola, from outperform to neutral. They are one of the largest grain producers in Brazil and one of the most efficient, he says, but he believes that the companys margins going forward will be very depressed because of higher fertilizer and pesticide costs. The stock, which at the time of Camposs downgrade was ahead of the sector by 18.4 percentage points for the year, slipped 3.0 percent through the end of July.
Juliana Rozenbaum of Itaú Securities, who finishes in first place in Consumer Goods for the first time since 2006, when she was with Deutsche Bank Securities (she moved to Itaú in 2007 and was ranked No. 2 last year), notes that lower interest rates have succeeded in motivating Brazilians to shop again, which is important because consumer spending is vital to Brazils economic rebound.
Her top stock pick is Lojas Renner, Brazils second-largest department store chain, with 115 outlets; the retailer also offers financial services, including credit cards, loans and annuities. Renners stock was hit hard last year, plunging 49.0 percent as anxious, cash-strapped consumers stopped spending. Apparel is not something that consumers really need, observes Rozenbaum, 33, who is based in São Paulo.
Renners story is quite different this year. In July the company reported stronger-than-expected second-quarter results, with same-store sales rising more than 2 percent year-over-year. Renners stock skyrocketed 74.9 percent in 2009 through July 31.
Brazils bull market came roaring back at a time of upheaval for many firms. Pedro Batista, head of Brazilian equity research at UBS Pactual (and the No. 3 analyst in Equity Strategy), says his firms pending sale to BTG Investments prevents him from commenting on changes that might take place once the transaction is finalized, but the Rio-based research director did disclose plans to hire four analysts after having lost nearly a dozen over the past year; the firm currently has 19 researchers, down from 30. The departures included Bruno Pereira, last years top-ranked analyst in Banking & Financial Services, who left in January to join Leblon Equities, an asset management firm located in Rio, and Guilherme Vilazante, last years No. 1 analyst in Real Estate, who joined Barclays Capital in February.
The researchers who remain at the firm track 107 companies, down from 128 a year ago. Some small-cap coverage was sacrificed, Batista says, so that analysts could focus on the large caps and highly liquid names. He plans to expand stock coverage as he rebuilds his team after the BTG sale is completed.
Pedro Martins Jr., São Paulobased director of Brazilian equity research for Banc of America SecuritiesMerrill Lynch (and the No. 2 analyst in Equity Strategy), says the January acquisition of Merrill Lynch & Co. by Bank of America Corp. didnt create any challenges for him; the new parent company didnt have any analysts in Latin America and so was able to easily incorporate Merrills 27-strong team. It was just a matter of adjusting our templates to put the BofA logo in there, he notes.
However, Martins did have to replace two analysts lost to rival Itaú including Marcos Assumpção, last years second-place winner in Natural Resources, who left in February as he significantly expanded his teams stock coverage, from 88 companies to 101. New stocks include shopping malls and small- and midcapitalization banks, Martins says.
Itaú Securities has undergone profound changes. In March the firms parent company, Banco Itaú, merged with Unibanco Holdings and Unibanco-União de Bancos Brasileiros to become Brazils biggest bank, with a market capitalization of R87.9 billion ($38.7 billion). Constantini, formerly the head of research and sales at Unibanco, was charged with integrating his team of 25 analysts with the 31 Itaú analysts and eliminating the overlap; his department now has 27 analysts.
In keeping what we thought were the best from both sides, he explains, the firm retained 15 analysts from Itaú and 12 from Unibanco. The researchers cover 135 companies, up from 120 the two departments had followed separately, and Constantini plans to add a few more stocks maybe six or seven. He also added a two-analyst quantitative research team to recommend specific sectors and suggest a variety of relative-value, long-short calls, he says. We were missing a product that could tell investors how to optimize their asset allocations.
Credit Suisse has the same number of analysts on its Brazil equity research team that it had last year 21 despite having lost co-director of Latin American equity research and Brazilian banks analyst Roberto Attuch. Leite, now the Swiss banks sole head of Latin American equity research (he finishes third this year in Chemicals & Oil), brought Marcelo Telles from Mexico City to São Paulo to oversee coverage of the Banking & Financial Services sector, where Attuch finished second last year. Credit Suisse analysts track a total of 107 Brazilian stocks, the same number as last year.
Attuch left the firm in November and in March was named head of Latin American equity research for Barclays Capital, which is aggressively expanding not only in Brazil but throughout Latin America. We intend to have full coverage within the next six months, covering about 100 companies, says the São Paulobased Attuch, who has already hired 13 analysts, enticing veteran researchers from Citi, Credit Suisse, UBS Pactual and other firms. Today we have coverage in Brazil and Mexico, and soon we will have coverage of Peru, Colombia, Chile and Argentina the full Latin universe.
That universe is expanding, especially in Brazil, where the market for initial public offerings is showing signs of new life. In June the country saw its largest IPO ever and the largest in the world in more than a year as Cía. Brasileira de Meios de Pagamento, or VisaNet, the Brazilian affiliate of credit card issuer Visa, raised R8.4 billion. The shares rose by 11.9 percent on the first day of trading.
The success of the VisaNet IPO is paving the way for more offers to come, says Leite. There are a number of companies that need capital to finance their growth and ambitions.
Click here to see the All-Brazil Research Team rankings.