Although cheap, Ibovespa lacks trigger to drive upward movement
The Ibovespa’s tumble from recent highs that happened in early April has wiped out the benchmark stock index's accumulated gains in 2022 and has shaken some of the metrics used by investors to calculate whether stocks are cheap or expensive to the lowest levels since the recovery from the 2008 global crisis. Even if prices seem overly discounted, the general market reading is that, in the short term, the local stock market needs some triggers to drive a new upward movement.According to calculations by BTG Pactual’s strategy team, the forward price to earnings ratio for the next 12 months of the Ibovespa is at 7.3 times, a level similar to that seen during the height of the political crisis that led to the impeachment of former President Dilma Rousseff in 2016.When Vale and Petrobras shares are removed from the calculation, the index is trading at 9.1 times its future earnings, which has not happened since the global economic recovery after the 2008 financial crisis.For Carlos Eduardo Sequeira, head of BTG Pactual’s research and analysis department for Latin America, the fact that Brazilian stocks were cheap at the turn of the year was one of the reasons that favored the strong flow of foreign funds to the stock market in the first quarter. After April, however, the lack of appetite of this class of investors ended up leaving the local market without support."The world situation has worsened and we could see this with the sharp drop in the S&P 500. We were supported by foreign funds at the beginning of 2022, while local funds were still suffering with cashing out. As of April, there was no support from either side, which led the Ibovespa to valuation levels that we hadn't seen in a long time," Mr. Sequeira says.According to Mr. Sequeira, for those with a longer investment term, the current levels of Ibovespa multiples offer a good opportunity. "It really looks very cheap," he says. However, in a market like this, in which there are intense movements of stock sales, exaggerations could end up further compressing the Ibovespa multiples."We are trading at a very large discount. But if there is an additional 10% or 15% drop in the S&P 500, it will be very difficult for local stocks to perform well. That is the point of greatest attention," he concludes.Guto Leite, Western Asset’s equity manager, agrees that stock assets in Brazil seem quite cheap in relation to historical averages. In the short term, however, the scenario remains challenging...
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