Emerging-markets valuations have made an extraordinary V-shaped move in the last six months, yet Brazil still looks almost as cheap as it did back in August.
Believe it or not, a big Brazil fund such as EWZ (NYSE:EWZ) has rebounded only about 6% since late August, when the Bovespa had been pounded to a forward P/E of 8.3.
As a result, the improvement in tone has barely brought EWZ back to a P/E of 9 — still far enough below the broad MSCI Emerging Markets valuation of 10 to tempt traders back to this healing-but-still-bruised market.
The question is, can those forward-looking earnings forecasts be trusted?
A slowing global economy will naturally drive analysts to downgrade their Brazilian earnings models to reflect reduced appetite in Asia for iron ore and pulp — China alone accounts for 15% of Brazil�s exports.
The answer is to focus on stocks that are less exposed to China. So skip Vale (NYSE:VALE), the second-biggest company on the Bovespa and the largest miner of iron ore in the world. Besides, Vale�s mines have been washed out by heavy rain, forcing it to leave 2 million tons of ore contracts unfilled.
We know China is still buying plenty of oil, though, which makes Petrobras (NYSE:PBR) a natural place to start looking. PBR is huge, but it�s definitely on an upward trend — up 20% year to date and just cracking the 200-day resistance line in the last few days.
If we hold this line, there’s plenty of room for upside. Before collapsing in the August sell-off, PBR was moving in a comfortable range of $30 to $45 over the last few years.
To get back on that footing again, PBR will need to rally an additional 17%. Meanwhile, the stock is on the cheap side, with a P/E of 8.85, and even with its massive petroleum reserves, it�s still priced at maybe 1.05 times book value.
PBR also stands to benefit from the ongoing shift in! institu tional portfolios, which were very underweight this stock for a long time. It takes a lot of buying to shift the needle here — we�re talking about the fourth-biggest stock in the world — but the needle is definitely moving back in the right direction.
On the domestic side, banks are also relatively immune to the shifting export cycle and are best-positioned to benefit from the local central bank�s recent efforts to relax some of the highest inflation-adjusted interest rates in the emerging world.
Still, Brazil seems to have won at least a temporary victory against inflation. The job market is tight, and despite the occasional problem for a fringe lender, credit quality is improving.
With conditions like these to work with, Banco Bradesco (NYSE:BBD) is probably our favorite name in the sector. BBD has it all: improving loan margins, net interest margins and a PEG ratio of just 0.50.
While the P/E is a little rich at north of 10, it still fails to reflect the true value of BBD�s loan portfolio. Price to book is all the way down at 0.33.
Compare BBD with Itau Unibanco (NYSE:ITUB) and the choice is clear on just about every measure. ITUB is more richly valued, with a P/E of 11+, trades at 2.45 times book value and a PEG of 1 and even has much worse credit quality than its rival.
So why buy ITUB when you can get BBD? We have yet to hear a good answer.
On last note: Watch the Brazilian real for your next hints on where the Bovespa is headed. The real was one of the worst-performing currencies last year, printing a 10.5% decline against the dollar. But in the last three weeks, it has shaped up as one of the fastest-appreciating currencies in the world.
Institutional traders need to buy reais before they buy Brazilian stocks. If that�s what�s going on here, the long-looked-for rally could be on the way.
No comments:
Post a Comment