New interest rate level delivers warning to variable income
Not very long ago, the biggest concern of equity investors seemed to be the increased attractiveness of bonds. Now the warning signs are more widespread. The new level of interest rates, reached amid a perception that the country has abandoned the fiscal rules in place since 2016 and persistently fast inflation, makes asset managers and analysts show caution with leveraged companies that have a large amount of short-term debt and that may suffer from a loss of traction of the Brazilian economy next year.The view that the spending cap rule has in practice been abandoned has started a substantial deterioration in financial conditions in the country, with interest rate futures soaring quickly.At the beginning of October, the interbank deposit (DI) rate for January 2023 was at 9.16% but ended the month at 12.22%. In longer terms, the dynamics was similar. The interest of the DI for January 2031 rose to 12.33% from 11.03%.As a result, the Ibovespa is still falling after peaking at 130,000 points in June. Brazil’s benchmark stock index ended October 6.74%. Since the peak, the index has dropped 20%.The higher interest rates can impact companies in different ways. The main ones are higher debt charges, higher capital costs and competition for investment flows, according to XP Investimentos.If interest rates really remain at the current level, companies will be affected on several fronts and the market assessment models, in general, still do not consider this new scenario, said Fernando Ferreira, chief strategist at XP."The impacts have not yet been felt by the companies, since they are not yet issuing debt with these new interest rates. The shares have already suffered some adjustment, but not to the point of contemplating the new scenario," he said.The recommendation is to be cautious with highly leveraged companies, regardless of the sectors in which they operate. "They will suffer more, especially those with debts maturing in the short term," he said.According to the report signed by Mr. Ferreira and XP’s stock strategist Jennie Li, the sectors most directly affected by higher interest rates in Brazil, considering debts exposed to the interbank deposit rate (CDI), are technology, media & telecommunications, real estate, small caps, retail and transportation.Mr. Ferreira also views with caution companies that already embed in their prices high growth predictions, a category of stocks...
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