After eight rate cuts totaling 450 basis points to a record low 8%, the Brazilian economy and stock market are still struggling to regain the growth of the last decade. Read this CNBC report for more details on the economy and interest rate cuts. Surely, now has to be the time to invest in this country.
The Bovespa (BVSP) now trades close to 3 year lows, only trading slightly lower in the August to October 2011 time frame last year. So why aren't the rate cuts propping up the stock market? For one, the market doesn't appear as forward-looking anymore. The original rate cut didn't happen until August 2011, meaning that it is just now impacting the economy. Unfortunately, it hasn't prevented the forecast for the economy from dropping to 2.5% now. Until this trajectory returns to increased growth, stocks probably won't move up much.
Unfortunately, these dramatic moves will ultimately lead to outpaced growth in the economy. This will eventually require another slew of rate increases to cool the economy. This endless boom and bust cycles caused by dramatic rate cuts aren't good for investors. Economists forecast at least one more cut to 7.5% and possibly more, if needed. Remember that rates are already at record lows at 8%, so the impact could be dramatic, as even the government benefits from finally obtaining reasonable interest rates.
Investors need to be ready for the shotgun start on the market. Once the market turns, it isn't likely to look similar to the 50% gain after the 2009 bottom. The problem is that the massive drop in rates will inevitably produce growth in the economy that won't be tamed for a while. Those last 4-5 cuts still have 6-12 months before any meaningful impact on the economy.
On top of that, Brazil still has huge projects involving the 2014 World Cup and 2016 Summer Olympics. Both are rallying cries back in 2011 that are all but forgotten with the recent market slump.
The interesting part is that this series of rate cuts matches the one from September 2008 through July 2009 of 500 basis points. Back then, the original cut proved to be the bottom in the market leading to a steady increase. Now the original cut was close to the bottom, but the market has rolled over and is looking to retest those lows nearly a year later.
Though earnings estimates continue to decline, one should assume the numbers will soon begin rising as the stimulus and interest rate cuts eventually prop up the economy. Below are some of the stocks bound to benefit as the tide turns with valuations extremely low.
Banco Itau (ITUB)
This bank is the largest domestic bank in Brazil, with a market cap exceeding $60B and revenue near $40B last year. With a forward PE below 7, it offers an attractive valuation for investing in the credit growth in this country. Most analysts are indifferent on whether ITUB or Banco Bradesco (BBD) provide the best investment opportunity in Brazil. One could presumably buy the cheaper one on any given day.
NII Holdings (NIHD)
Wireless provider building out 3G networks in both Brazil and Mexico, plus other Latin American countries. Stock hit a new 52 week low this week, even though the 3G network in Mexico is about operational and Brazil will be complete this year. At nearly $7B in annual revenue, NIHD is not a small wireless provider, though likely mostly unknown.
Stock trades at a 12 forward PE, though analysts expect a nearly 18% annual growth rate. Those numbers don't even account for the plunging estimates as demand softens while awaiting the new 3G networks. Undoubtedly, investors are concerned about the expenses and debt load for building out these 3G networks in the middle of a feared global slowdown.
Leading steel producer in the Americas with a heavy focus on Brazil and the U.S. The company expects revenue to hit nearly $39B this year, which would be up 10% from 2011, but earnings are expected to slump. The stock trades at a sub 6 PE if analyst estimates of $1.53 are reached. It also offers an attractive 1.4% dividend yield.
The company should ultimately benefit from the infrastructure requirements-- not only for the World Cup and Olympics, but just the general needs for more housing in the country.
Vale is the leading explorer and producer of basic metals in Brazil and internationally, with a focus on iron ore and pellet production. The company has been a big benefactor of the booming demand in China over the last decade. Any further slowdown from that country will ultimately impact Vale.
The company is a behemoth, with expectations for $55B in revenue this year. The stock trades at a meager 5 forward PE. As with all of these stocks, the forward estimates continue dropping, so the bottom may have not been reached yet. Analysts, however, expect earnings of $3.62 currently and only a slightly higher $3.68 90 days ago.
The interest rate cuts and special events in Brazil will ultimately jolt that economy back into fast growth. The market remains incredibly pessimistic, providing alert investors the opportunity to jump into these stocks near recent lows.
Disclaimer: Please consult your financial advisor before making any investment decisions.