Brazilian analysts vaccinate stock portfolios against coronavirus

. Mar 03, 2020
Brazilian analysts vaccinate stock portfolios against coronavirus Image: DOERS/Shutterstock

In February, alarmed by the outbreak of the novel coronavirus and its potential effects on the economy, Brazil’s benchmark stocks index Ibovespa registered its worst monthly dip since 2018. For this month, analysts from some of Brazil’s main brokerage firms increased the defenses of their recommended stock portfolios. But despite the turbulence and uncertainty provoked by Covid-19, there is some residual optimism among some brokerages.

</p> <p>The unanimous opinion of analysts in Brazil is that the coronavirus outbreak is a source of volatility that is likely to rein in the country&#8217;s hopes for GDP growth. However, there is no consensus on exactly <em><a href="">how big</a></em> of an impact the spread of Covid-19 will cause.&nbsp;</p> <p>For XP Research, pillars such as <a href="">low interest rates</a> and the inflow of capital to variable income investments will remain intact. They believe that the coronavirus risk lies with companies, who could see their profit margins shaved down.&nbsp;</p> <p>BTG Pactual added that February&#8217;s rout has put Brazilian assets into a favorable price range and, though it is too soon to say that Ibovespa&#8217;s bleeding has been curtailed, “it would be fair to assume that in many situations most of the sell-off has already occurred.” As a result, Brazilian stocks are &#8220;cheap.&#8221;</p> <h2>Brokerages batten down the hatches&nbsp;</h2> <ul><li>From its portfolio, Terra Investimentos decided to ditch steelmaker Gerdau, which saw poor performance in Q4 2019 and may be highly affected by weaker demand for steel due to the Covid-19 outbreak. In its place, Terra sought protection by adding Bradesco bank—a defensive blue chip—to its arsenal, due to the financial institution&#8217;s good operational performance at the end of last year.&nbsp;</li><li>BTG Pactual also snubbed Gerdau, though turned to fuel distributor Cosan, “which continues to execute its fuel distribution business flawlessly whilst intelligently operating its energy business.” Real estate company BR Properties was also dumped, with BTG picking up São Paulo&#8217;s state-controlled water company Sabesp in its place. While the market as a whole is struggling, Sabesp is on its own trajectory, eyeing trigger points such as the approval of the new nationwide sanitation framework and its possible privatization.&nbsp;</li><li>Guide Investimentos replaced Banco do Brasil bank for industrial group Weg. “The devaluation of the Brazilian Real, alongside the recovery of industrial demand and market growth, have boosted Weg’s results,” wrote analysts.&nbsp;</li><li>XP Research dropped jewelry maker <a href="">Vivara</a>—affected by risk aversion and the rise of gold prices—and picked up fashion retailer Lojas Renner, eyeing increased liquidity. They also added utility company Copel, seen as a good turnaround case in a more stable sector.&nbsp;&nbsp;&nbsp;</li></ul> <h2>Stimulus in sight</h2> <p>Global central banks&#8217; moves to respond to the Covid-19 outbreak demand close attention from investors. As of Monday, the <a href="">Bank of Japan vowed to provide liquidity</a> and helped create a global rebound in stocks, including those in São Paulo.</p> <p>As far as Brazil is concerned, Guide Investimentos believes the outbreak may allow for further interest rate cuts, in spite of the Central Bank&#8217;s recent decision to stop its easing cycle. A key date to look out for will be March 18, as the Central Bank and the U.S. Fed will both announce their next monetary policy decisions.&nbsp;</p> <div class="flourish-embed flourish-chart" data-src="visualisation/1497393"><script src=""></script></div> <h2>Domestic scenario</h2> <p>Beyond the panic caused by the novel coronavirus outbreak, the slow pace of Brazil&#8217;s structural reforms is also provoking concern on domestic markets. Analysts from Terra Investimentos talk of a sense of disbelief toward approving the reform packages, “due to the delay in debates in the House and the Senate.” Guide Investimentos mentions the rift between President Jair Bolsonaro and Congress as an “additional source of apprehension” that is likely to delay reforms even further.

Natália Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Before joining The Brazilian Report, she worked as an editor for Trading News, the information division from the TradersClub investor community.

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