(Folha de S. Paulo) Stocks of Companies Typically Favored by PT Governments Struggle Amid New Interest Rate Hikes
When President Luiz Inácio Lula da Silva (PT) won the 2022 elections, financial market analysts began identifying which stocks on the stock exchange were likely to thrive under a government that, as in previous administrations, prioritizes social benefits and opposes privatizations.
Based on reports from banks and analysis firms, Folha compiled a list of stocks frequently mentioned by analysts at the time and commissioned Elos Ayta Consulting to analyze their performance over the first two years of Lula's third term.
The report simulated an investment portfolio, nicknamed the "Lula Portfolio," consisting mainly of stocks from the construction, retail, and education sectors, as well as some alternatives to state-owned enterprises, given investor concerns about government intervention in these stocks. For oil companies, Prio was frequently cited as an alternative to Petrobras.
In the banking sector, Bradesco was highlighted by analysts at Genial Investimentos, primarily due to its loan portfolio profile, which is more focused on individuals and more exposed to lower-income segments than other major banks.
According to the study, in the first year of the government, this simulated portfolio surged by 45.19%, outperforming the main stock exchange index, the Ibovespa, which rose 22.28% in 2023 following a rally at the end of the year.
However, by December 18 of this year, these stocks had reversed part of their gains, dropping 22.27%—a worse performance than the Ibovespa, which fell 10% over the same period. Still, the two-year total remains positive, with the portfolio gaining 13.33%, while the Ibovespa is up 10.06%.
A sector that illustrates this trend well is construction, particularly companies aligned with the Minha Casa, Minha Vida housing program.
After President Lula expanded the housing initiative mid-last year, the stock prices of companies like Cury, MRV, Plano&Plano, Direcional, and Tenda soared, driving the B3 Real Estate Index (Imob) to become the best-performing index on the stock exchange in 2023, rising 53.27%. However, this year, the index has fallen 24.28%, leaving it with a cumulative gain of 16.05%.
The B3 Consumption Index (Icon) followed a similar path. It rose modestly by 6.98% last year but declined 21.90% in 2024. Over the two years, the total drop is 16.45%.
In the portfolio constructed by the report, three retail stocks were frequently mentioned by analysts, who believed the government’s income transfer programs would boost them: Magazine Luiza, Casas Bahia, and Assaí. However, burdened by high debt amid rising interest rates during a period of expansion, these companies failed to perform positively, even last year.
Another group of stocks in the portfolio comes from the education sector. Companies like Ânima, Cogna, Cruzeiro do Sul, Ser Educacional, and Yduqs thrived in 2023 due to expectations that social programs like Fies and ProUni would bolster their results. Yet, as with other sectors, market pessimism toward the government this year has pressured these stocks, with many losing all the gains made last year.
"The main characteristic of the stocks in this portfolio is that they are domestically focused. This makes them highly sensitive to macroeconomic factors. In a scenario of rising inflation, worsening indicators and forecasts, and interest rate hikes, as we are seeing, they tend to suffer," says Matheus Amaral, equity specialist at Banco Inter.
Amaral notes that many of these companies were recovering in their financial statements and stock performance due to falling interest rates last year. But investor concerns about fiscal results and public debt since midyear, which led to stricter fiscal policies, caused a setback. "Risk perception has returned, and that penalizes these companies," he says.
According to Amaral, while external factors were the main drivers of Brazil's financial market earlier this year, the stock exchange is now almost entirely dependent on domestic political and economic developments. He predicts that the stock market’s recovery next year will depend on the government’s fiscal commitment.
"Until midyear, Brazil’s domestic market was heavily influenced by the Federal Reserve's decisions. But when the U.S. began cutting interest rates, foreign investors started paying more attention to Brazil, and the country’s fiscal outlook became a focal point," he says.
As a result, Brazil was unable to benefit from the U.S. interest rate cuts, as fiscal risks dominated investors' concerns.
FIXED INCOME
Fixed-income securities followed a similar trajectory to equities during these two years of government. Last year and for much of this year, asset managers heavily invested in infrastructure funds, while the real estate market issued numerous debt securities.
However, Luis Miraglia, partner at Seneca Capital, says managers are beginning to shift investments from inflation-linked funds to those tied to the CDI (Interbank Deposit Certificate), which tracks the Selic base interest rate.
"The private credit market has grown in recent years, with increasingly long-term securities. However, part of this market is tied to inflation. If inflation rises, investors holding these securities suffer losses. Long-term funds, such as infrastructure and real estate, are already experiencing losses this December," Miraglia explains.
Miraglia adds that with steep interest rate hikes, investors tend to favor fixed income over equities next year. Within fixed income, he notes a trend of shifting from funds that pay a fixed rate plus the IPCA (Broad Consumer Price Index) to those offering a rate plus the CDI.
From the companies' perspective, Miraglia observes that while some Treasury Direct bonds have seen rates rise from 6.5% to 8.5% within a month, corporate debt is now being issued with returns of 10%. This situation could lead to fewer corporate debt issuances and a significant decline in the private credit market next year.
Published in Folha de S. Paulo on 12/22/2024. Available at:
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