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The Research Firms Helping Investors Navigate Big, Fat Risks in Brazil
Bradesco BBI and BTG Pactual lead II’s 2022 All-Brazil Research Team.
Amid a volatile year, investors have more questions than ever about Brazil — and the country’s top research providers are here to provide answers.
“One of the most frequent questions from investors describes well the state of Brazilian equities over this past year: Are Brazilian equities a value trap or a value play?” observed André Carvalho, director of research at Bradesco BBI. Brazilian equities have been trading with depressed multiples and high-risk premia, he added, and the current consensus forecast for the next 12-month price-to-earnings ratio is more than two standard deviations below its historical average.
Carvalho said five “fat negative tail risks” are weighing on the market, including three global and two domestic risks. “In the first group, there is concern about Chinese growth collapsing, risks related to the war in Ukraine, and a possible hard landing in the U.S.,” he said. “In the second group, [there are] concerns about high and sticky inflation in Brazil as well as elevated uncertainty about the fiscal anchor after the presidential election. In our view, these five key risks will be critical to the upcoming performance of Brazilian equities.”
While inflation has impacted not only the globe but the whole region of Latin America, it is more striking in Brazil, according to Carlos Sequeira, head of research at BTG Pactual. “In Brazil, maybe because of our fiscal situation, rates were raised more than in other countries,” he said. “And I think this has caused a misalignment of money flowing out of equities, which is more pronounced in Brazil.”
Amid this volatility, the buy side has stuck with domestic research firms for market insights: Bradesco BBI and BTG Pactual have once again tied for first place in Institutional Investor’s 19th annual All-Brazil Research Team.
The two firms each earned team positions in all 19 categories, with BTG Pactual nabbing a first-team position in 15 of them.
II solicited the opinions of more than 470 directors of research and investment professionals at 305 asset management firms with significant securities holdings in Latin America. These responses were weighted by each organization’s Brazilian commission spend.
In these commission-weighted team results, a cadre of global firms followed Bradesco BBI and BTG Pactual, with JPMorgan Chase & Co. in third and UBS in fourth. BofA Securities rounded out the top five.
An additional leaderboard based on individual analysts was also produced, in which BTG Pactual and Bradesco BBI took first and second, respectively. BTG Pactual edged past Bradesco with 20 total team positions to Bradesco’s 17, and also captured more first-team positions, with 13 compared to Bradesco’s two.
Carvalho cited Bradesco BBI’s ability to differentiate its offering “by developing strong brands, providing exclusive data, and incentivizing our analysts to work together on cross-sector and in-depth reports.” Some of the firm’s most-read reports during the past year included its proprietary-data series, Data Vault; ESG research; a cross-sector analysis about the impact about the impact of war in Ukraine on Brazilian equities; and a deep dive into the Warren Buffett-backed Latin American startup Nubank.
Additionally, Bradesco BBI has also been investing heavily in its corporate access service to “integrate it more tightly with the research team, and connecting it better to non-listed companies that the bank works with,” Carvalho added.
At BTG Pactual, Sequeira highlighted low turnover and a longstanding team as key to his firm’s success in Brazil. “We have been having the same lead analyst that we had last year,” he said. “I think that’s one of our strengths that we’ve had the same team in place for many, many years.”
While the Brazilian macro landscape has been turbulent, the micro landscape has been vibrant, according Carvalho. Bradesco BBI research on more than 230 listed companies in Brazil saw net profits reach a historical high of 6.8 percent of GDP in the four accumulated quarters up to the first quarter of this year, with operating margins at 22 percent versus the historical pre-pandemic average of 17 percent. “Therefore, despite acknowledging the importance of macro triggers to drive the market, stock picking has been playing a key role in our model portfolio performance,” Carvalho said. “Indeed, we prefer high quality and liquid companies that offer resilient margins and that are presenting returns with material asymmetry to the upside.”
The deluge of IPOs in the country over the past three years has come to a halt with the exception of one: Eletrobras, the largest government-owned generator in the region, was privatized last month in Brazil in the biggest privatization since the Tebras telecommunications system in 1998.
”Other than that big transaction, the market’s pretty quiet,” Sequeira said. “It’s very, very hard to IPO small-cap companies. This year the market has no appetite for small-cap deals.”
Adding more uncertainty to the region is the upcoming Brazilian election in October. The Brazilian Supreme Court restored former President Luiz Inácio Lula da Silva’s political rights in April of last year, making him eligible for candidacy. “Since then, pollsters have been showing the two best-known candidates, Jair Bolsonaro and Lula, ahead in the polls, suggesting a polarized race,” Carvalho said. “With low visibility on post-election economic policy and acknowledging the challenge of setting a new and sustainable fiscal anchor, Brazilian assets have been embedding a high probability of an imminent macro disruption, as if the fiscal anchor in Brazil no longer remains in place.”
There is also a bifurcation between global and domestic client concerns, with local investors appearing to care more about the two risks in Brazil — inflation and elections — while international clients give a much higher weight to global drivers such an economic slowdown in the U.S. and China. “This different assessment is so pronounced that sometimes we hear people saying that international investors do not care much about Brazilian elections, a statement with which we disagree, because they care about elections, but care much more about the risk of a hard landing in the U.S., for example,” Carvalho said.
Carvalho added that he expects the five risks to recede gradually during the coming quarters, with high market volatility in the interim. But this is not without its silver linings for the sell-side. “One big challenge for broker dealers will be to continue investing and retaining senior people when market liquidity dries up and the primary offerings face a pause, as we are currently seeing,” Carvalho said. “As Bradesco BBI is highly committed to the Latin American region and has a diversified portfolio, we think it is in an excellent position to navigate through such challenging times.”