BTG Pactual Claims Victory in Brazil

The three-way tie for Brazil’s best research provider has been broken.

BTG Pactual pulled ahead of rivals Itaú BBA and JPMorgan Chase & Co. to claim the top spot in Institutional Investor’s 2018 All-Brazil Research Team.

The Brazilian bank, which this year also placed first in the broader Latin America Research Team, was the favorite in a survey of more than 870 investment professionals at 436 institutions managing about $151 billion in Brazilian equities and $236 in Brazilian debt. Buy-side analysts and portfolio managers voted for the top analysts covering Brazil across 19 industry sectors and macroeconomic disciplines.

Itaú BBA and JPMorgan ranked second and third, respectively, while Bradesco BBI and Credit Suisse rounded out the top five research firms. A separate ranking, based on individuals rather than analyst teams, featured a first-place tie between BTG Pactual and Itaú BBA.

Research heads at BTG Pactual, Itaú BBA, and JPMorgan pointed to the upcoming general election and fallout from a recent transportation strike in May as having the greatest effects on the markets in a country that recently came out of its worst recession in history. 

“Brazil is the biggest open election at this point,” said Carlos Sequeira, head of BTG Pactual’s equity research team. The country has a general election scheduled for October, and campaign season is underway after starting up in mid-July.

The campaign period is truncated compared to previous election years, which could result in more volatility as the elections draw closer, according to Luiz Cherman, head of Brazil equity strategy for Itaú BBA. 

“More fundamental variables such as corporate investments and job creation have been sluggish this year, in spite of record low interest rates,” Cherman said. “Uncertainty regarding elections and the resulting path toward fiscal reforms probably were an important factor behind this performance.”

A 10-day strike by truckers over high fuel prices in May exacerbated these issues, leading Brazil’s Ibovespa stock index to plummet. Price-to-earnings ratios for the country’s equities are now trending close to levels seen during the “worst moments” of the 2016 political crisis surrounding President Dilma Rousseff’s impeachment, noted Pedro Martins, head of Latin America equity research at JPMorgan.

“We do see that structurally the country is sturdier, with low inflation, low rates, solid external accounts, and plenty of reserves,” Martins said. “Election jitters were brought to the forefront by May’s truckers’ strike. From here we think polls could be a bit more market friendly at the same time that commitments to a minimum agenda on social security could become more evident.”

Other research heads emphasized the need to address Brazil’s large fiscal deficit. “The market has been vocal about fiscal reform,” BTG Pactual’s Sequeira said. “Because of this big imbalance, the Brazilian elections become much more important, and the country must elect someone who can deal with it so it’s less impacted by higher rates in the U.S.”

The main challenge, according to Itaú BBA’s Cherman, is to harness support for a comprehensive fiscal reform that “curbs, or at least slows, public spending growth,” which he believes has a large upside for the country. 

“The biggest opportunity is to create the conditions to ensure that in the next monetary policy hiking cycle, interest rates do not go back to double-digit levels,” he added.

The draw to invest in Brazil is the same as in any emerging market, where clients want to see a return of economic growth, Cherman said.

“Brazil has great potential in the coming upward cycle,” he said. “After falling massively in previous years, the Ibovespa’s earnings today are at a level similar to 2011.”