Local Research Triumphs Again in Brazil

There are not one but two new leaders in Brazil equity research. 

Bradesco BBI and BTG Pactual were voted as the top providers in Institutional Investor’s 18th annual All-Brazil Research Team, based on the opinions of more than 480 investment professionals at 322 firms with major Latin American securities holdings.

After a year dominated by both the depths of the coronavirus pandemic and the heights of strong market activity, institutional investors relied on these two domestic firms for local expertise. With the Brazilian presidential election slated for 2022, global investors will be looking for even more insights. 

“Things change so rapidly when it comes to politics in the region, and it has an impact on investment and investment sentiment,” said Carlos Sequeira, head of research at BTG Pactual. “We have elections next year so this could be a factor of more volatility in the markets.”

The election of Jair Bolsonaro in 2018 was met by optimism — specifically from the capital markets. Since the onset of the Covid-19 pandemic, however, the administration has made headlines for downplaying the virus, resulting in the second highest global death toll as variants have surged and the fully vaccinated population sits at 16 percent, according to Our World in Data. 

The country is now in a race to deploy both doses of the vaccine to its population. Still, top researchers recognized Brazil’s efforts in providing several government assistance programs to mitigate the adverse effects of the pandemic. 

“Our clients’ two main concerns are inflation and the 2022 presidential election in Brazil,” confirmed André Carvalho, head of macro, strategy and fixed-income research at Bradesco BBI.

“We expect the October 2022 presidential election in Brazil to be a polarized contest, and President Bolsonaro and former President Lula are likely to be the two strongest candidates,” he added. “In the next twelve months, they will probably talk to their political base in order to secure their places in the run-off election, and they are unlikely to show much moderation in their political narratives.”

By July 2022, voters will be paying more attention to the election race and candidates will have greater incentive to move toward the political center, Carvalho added. 

When it comes to investors’ other primary concern — inflation — Bradesco BBI expects more monetary tightening by the Brazilian Central Bank. As for the United States, the firm expects the U.S. Federal Reserve to start tapering in the second half of 2021 and gradually begin lifting rates in 2022, keeping liquidity high for longer. “Although this may add to uncertainty throughout the normalization process,” Carvalho said. 

Both inflation and the presidential election are already affecting Brazilian equities. “The presidential election in October 2022 has already started to affect asset prices in Brazil, in our view, by keeping risk premiums high,” Carvalho said. “In our base case, the Brazilian market will be driven solely by EPS [earnings per share] growth and trade at an equity risk premium that is close to two standard deviations above the historical average up until the election.” 

After the presidential election, risk premiums may compress materially, providing additional upside. But Bradesco believes Ibovespa, an index of the country’s stock exchange, will reach 135,000 points at year-end 2021 and 150,000 points at year-end 2022, up from its current 124,000 points. “In our view, risks seem biased to the upside,” Carvalho said.

“The market in Brazil continues to be very hot,” said BTG Pactual’s Sequeira. “We are seeing a lot of money available around the globe and this is helping. Interest rates in Brazil were moved to a level we haven’t seen in a long time — both long and short.”

Domestic demand has been strong — driven by the fiscal stimulus, the reopening of the economy, and a strong labor market, despite a challenging fiscal and political situation. 

Mutual fund and equity investments have jumped from 8.5 percent in 2016, before this government was elected, to almost 16 percent, after a high of 22 percent in 2007, according to data from BTG Pactual.  “There is a perfect correlation between short term rates and higher investments in equities,” Sequeira added.

Strong capital market activity continues in Brazil, summed up by a flurry of IPOs and follow-on offerings, which reached R$90bn in 2019, R$118bn in 2020, and R$66bn up until May. “This was a new all-time high in a 3-year period,” according to Bradesco’s Carvalho. “Moreover, in our view, this should be a long-term trend in Brazil.” With a lower interest rate environment, capital markets will continue to develop, becoming deeper and more diversified, while also providing additional investment alternatives (such as healthcare, tech, and consumption) and a clear competitive advantage for listed companies, he added.

While Bradesco and BTG Pactual were elevated from their 2020 second place finishes to the top spots this year, JPMorgan Chase & Co. slipped to third place in the All-Brazil Research Team ranking, in which voters rated their top firms in each sector. These responses were weighted by how much voters spend on Brazilian research.

UBS took fourth place in this commission-weighted leaderboard, followed by Santander, which improved from seventh place to take fifth. 

A separate leaderboard recognized individual analysts, with Bradesco BBI at No. 1 and BTG Pactual in second, followed by JPMorgan in third. UBS took fourth, and BofA Securities rounded out the top 5. Additional AUM-weighted leaderboards were also produced by II which largely mirrored the commission-weighted ratings.

Bradesco’s Carvalho credited his firm’s success to its investment in broker-dealer activities and tenured analysts. “We have very senior lead analysts, with an average experience on the sell-side of more than 15 years, and they are able to develop in-depth analysis and can identify key risks and opportunities for clients,” he said. 

BTG Pactual’s Sequeira likewise believes his team’s seniority and analyst-partnership model help spell success for the firm. According to the research head, the firm grew its Brazilian analyst team by 30 percent this year with no turnover among the more senior members of the team.

“The quality of the locally based team means we have strong roots in what is happening in the markets,” he said.