Usually, a 0.4-percent GDP growth rate would not be any reason for celebration. But expectations around the Brazilian economy were so grim that analysts were actually excited about the Q2 2019 results. The Brazilian stock market benchmark index reached a record 106,000 base points, and there remains room for it to grow further—leading investors on a hunt for sleeper stocks that could offer sizeable returns in the long haul.

Since January, the Ibovespa Index rose 16.4 percent—much less than ICON (which measures publicly traded retail companies), at 23 percent, and IMOB (real estate), at 31.2 percent.

</p> <div class="flourish-embed" data-src="visualisation/668678"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <p>That&#8217;s because, in a country as reliant on family consumption as Brazil, sectors which reflect the state of domestic demand are more sensitive to any improvement in economic outlook. Anticipating a heating up of these markets, investors tried to get ahead of the curve.</p> <h2>So, are there any opportunities left?</h2> <p>Analysts believe so. And that’s because the <a href="https://brazilian.report/money/2019/04/07/brazil-economy-construction-sector/">construction business</a> has a longer developing cycle—from purchasing land to building and selling properties. Builders are still diminishing the massive inventories built up during the 2015-2016 recession and it takes time to pick up launches and new sales.</p> <p>“Some building companies are big, but they had serious issues, such as Gafisa (which faces a fight between shareholders and changes in management). It is a company trying to reassemble—a process that could take time to fix,” said Régis Chinchila, an analyst at Terra Investimentos.</p> <p>Construction is also famous for having ripple effects on other sectors—as it is labor-intensive and opens up a market for other players. For Mr. Chinchila, as new homes start to be delivered companies focused on finishing work—such as Duratex—are also positioned to profit.</p> <p>Meanwhile, the retail sector also continues to perform way below full capacity. Merchants are placing their chips on the upcoming holiday season, preceded by dates such as Children&#8217;s Day, on October 12, and <a href="https://brazilian.report/money/2018/11/21/black-friday-brazil-scam/">Black Friday</a>, in November. However, end-of-year sales provide only a quick fix. For Mirae Asset analyst Pedro Galdi, retail will only really boost by the time employment and income levels rise.</p> <p>“Staple food companies will be a good niche for investing when consumers&#8217; income goes up. So far, retail has been performing on the back of e-commerce, which is growing. This year is doomed, but next year Brazil will have low interest rates, low inflation, so everything connected to the local economy has a higher demand,” he told <strong>The Brazilian Report</strong>.</p> <p><a href="https://twitter.com/BBIResearch/status/1167425972678877185">Bradesco BBI Research</a> analyst Marina Valle also expects stocks focused on the domestic market to benefit from Brazil’s growth, with strong earnings per share prospects. The bank’s research area now includes energy company CESP, travel agency CVC, shopping mall administrator Iguatemi, port logistics company Santos Brasil, homebuilder Tenda, and software maker Totvs in their recommended small caps list.</p> <h2>What comes next for investors</h2> <p>Even though growth remains sluggish, market movers are eager for the economy to pick up, which, coupled with federal government programs such as privatizations and infrastructure concession auctions, will draw more investment. And this is the time when sectors such as industry may finally blossom.</p> <p>Mr. Galdi is betting on steel-related stocks for this period, as the material is essential for infrastructure assets—including homes and larger works, such as the railways and roads planned by the Jair Bolsonaro administration.</p> <p>Privatizations and concessions have been some of the Brazilian market&#8217;s biggest triggers since the 2018 general election. Stocks such as Cemig (CMIG4), The Minas Gerais state-owned energy company, jumped 100 percent since last October in the hopes of better management and, eventually, privatization by libertarian Governor Romeu Zema.</p> <p>Recently, Mr. Zema <a href="https://economia.uol.com.br/noticias/estadao-conteudo/2019/08/28/privatizacao-da-cemig-copasa-e-gasmig-devem-ficar-para-2020-ou-2021-diz-zema.htm">announced</a> that the much-expected privatization of Copasa and Cemig (and its gas unit, Gasmig) will only happen in 2020 at best, or even 2021, as it requires approval from the state legislature. Mr. Chichila still recommends Cemig, as the energy sector is one of his favorites to enjoy the expected boom.</p> <p>Both analysts also quote infrastructure company CCR as a well-positioned player to find good opportunities in the concession auctions that are set to come. The company faced a thorough reputation crisis in 2018, after subsidiaries in Paraná were involved in Car Wash Operation-related scandals. However, CCR struck a deal with prosecutors last March, paying <a href="https://g1.globo.com/pr/parana/noticia/2019/03/06/lava-jato-fecha-acordo-com-concessionaria-de-pedagio-investigada-por-pagamentos-de-propina-no-parana.ghtml">BRL 750 million</a> in fines and agreeing to reduce toll fares.</p> <p>Bradesco BBI’s analyst Victor Mizusaki highlights that “while global airport operators could dominate the sector in Brazil, CCR is the sole local player with the capital and expertise to turn the game around.”</p> <figure class="wp-block-embed-twitter wp-block-embed is-type-rich is-provider-twitter"><div class="wp-block-embed__wrapper"> <blockquote class="twitter-tweet" data-width="550" data-dnt="true"><p lang="en" dir="ltr">With Brazil&#39;s gov&#39;t’s plans to sell minority stakes in airports and auction new concessions, Victor Mizusaki writes that while global airport operators could dominate the sector in BZ, CCR is the sole local player with the capital/expertise to turn the game around. <a href="https://twitter.com/hashtag/airports?src=hash&amp;ref_src=twsrc%5Etfw">#airports</a></p>&mdash; BBIResearch (@BBIResearch) <a href="https://twitter.com/BBIResearch/status/1166345468294643712?ref_src=twsrc%5Etfw">August 27, 2019</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script> </div></figure> <p>Mr. Galdi also sees an opportunity for the auto sector, which has been much affected by the <a href="https://brazilian.report/power/2019/06/07/common-currency-brazil-argentina/">Argentinian crisis</a> in 2019. Vehicle exports have fallen almost 40 percent this year versus 2018 levels. Per newspaper <a href="https://oglobo.globo.com/economia/brasil-vai-renovar-acordo-automotivo-com-argentina-nesta-sexta-livre-comercio-sera-gradual-diz-fonte-23929297?utm_source=aplicativoOGlobo&amp;utm_medium=aplicativo&amp;utm_campaign=compartilhar"><em>O Globo</em></a>, as the free-trade automobile deal between the two countries expected for 2020 is set to be postponed, it looks like exports won’t see that much of a boost.</p> <p>For the analyst, however, by the time the local demand for both trucks and cars picks up, the stocks may follow as well.</p> <h2>Blood in the streets</h2> <p>Stocks perform on the expectation of better profits for companies, but technical factors also affect trading. In other words, you need to have more people buying than selling for the value of an asset to rise.</p> <p>In August, the Brazilian market faced the biggest flight to the safety of foreign capital over a <a href="https://www.valor.com.br/financas/6420095/saida-mensal-de-capital-externo-na-bolsa-e-recordehttps://www.valor.com.br/financas/6420095/saida-mensal-de-capital-externo-na-bolsa-e-recorde">month in 23 years</a>. BRL 10.79 billion was taken out of the Brazilian stock market, as foreign investors became risk-averse amid the escalating U.S-China trade war. Even though Washington and Beijing are trying to find ways to get along, the money drain for emerging markets continues. On September 3, withdrawals reached BRL 2.19 billion, the <a href="https://www.istoedinheiro.com.br/estrangeiros-retiram-r-219-bi-da-b3-no-dia-3-e-a-maior-saida-diaria-desde-3-1/">second-highest</a> for a day in 2019. Considering that foreign investors correspond to 44.5 percent of B3’s spot market volume, fighting against the flow may leave some bruises.</p> <p>“Investors must be careful regarding the size of variable income in their portfolio. There’s a lot of doubt out there and the outflow on emerging markets makes it worse. But it is an interesting moment to position in the market if you look for the longer-term. If you wait too long, Ibovespa may reach 120,000 points and you lose good opportunities”, says Mr. Chinchila, highlighting that he normally recommends a 30 percent share for stocks in the portfolio and a six-month investment horizon.

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MoneySep 12, 2019

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BY Natália Tomé Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.