Stock analysts revise price targets amid high inflation, interest rates
These are tough times for everyone, especially for those who make a living out of foreseeing the future. Investment analysts, who specialize in predicting how much a stock will cost and recommending or not its purchase, are having to work twice as hard to keep their models up to date in a game that is key for them to move before the market does.In recent months, dramatic changes in the global economic environment, with all-time high levels of inflation and interest rates, have forced analysts to revise their projections for stocks. Last week, the European Central Bank adjusted rates for the first time since 2011, for instance. Here in Brazil, a survey carried out by Valor shows that in some industries more sensitive to price increases, there has been an 80% reduction in the target prices of companies covered by banks and asset management companies over the last three months.As reports to clients show, analysts are rushing to update "macroeconomic assumptions" -inflation, interest rates, and higher cost of capital - which invariably changes the central mechanism in calculating a company’s value: the discount rate.To determine the "fair price" of a company, typically for a 12-month term, analysts project its cash flow for the next few years and then bring it to present value using a discount rate, which tries to balance the expected return with the risks involved."The discount rate is the more artistic side of company analysis and asset management," writes asset manager Alexandre Póvoa in the book "Valuation — Como precificar ações" ("Valuation - How to price stocks"). It is an art that involves "variables that interact with each other," for which there is no "scientifically correct answer."The performance of companies - one of the most important variables - seems to resist well the macroeconomic instability, which is a great unknown at the moment. One example is the constant adjustments economists are making in their GDP growth projections: they went to 2% in the most recent round of revisions from zero at the beginning of the year. The very polarized election in October is not much of a help as analysts struggle to find fair prices compared with current prices.Recent signs of cooling inflation in Brazil, which came in the mid-month inflation index IPCA-15 data released Tuesday, may force a fine adjustment upwards - the index is known as a reliable predictor for official inflation. If the global outlook worsens even more, another round of...
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