The year 2020 saw the world experiencing unprecedented times. In addition to major political shifts, the worldwide Covid-19 pandemic affected everything from our day-to-day lives to the performance of the economy and major financial markets.
However, it was not all bad. The Brazilian stock market performance changed completely during the pandemic, and experienced a major boost. To illustrate this point, we take a look at the two most striking pieces of data collected by the São Paulo Stock Exchange Index (IBOVESPA) this year:
- On February 25, there was a variation of -2.86.
- On May 7, there was a variation of 1.77.
What happened?
In an interview with InfoMoney, XP Investments chief strategist Fernando Ferreira explained the reasons behind this growth. Based on Ferreira’s analysis, this spike was the result of a supercycle in commodities as well as Brazil being the country with the largest number of products in the category.
Who grew?
The result of this change quickly reached the big brands. Vale, for example, benefited from the appreciation of iron ore, its flagship export product, which grew by more than 30% in 2021. On May 7, this material reached 200 USD a ton, a number reached for the first time in history.
In more direct numbers, this change promoted gains of 42.33% for Vale in 2021, with 4.59% in May alone. The company’s shares now account for 12.3% of the composition of the theoretical portfolio of IBOVESPA.
In addition to iron ore, gains were also recorded through oil. During the first five months of 2021, Brent barrels rose 34.43% and reached $69.42. However, this increase may deceive investors who do not take their eyes off Petrobras.
Despite its shares advancing 11.47% in this period, the company continues operating in the red. Much of this is due to the country’s political instability, which promotes interventions that frighten specialists in this area.
Overcoming the pandemic
In the same InfoMoney article, BNP Paribas equity fund manager, Marcos Kawakami, explained the stock market growth in relation to overcoming the crisis caused by Covid-19.
According to Kawakami, the gradual attempts to return to normality, combined with fiscal stimulus for infrastructure development, is one of the main reasons for this growth. This can be explained by the increase in the use of raw materials, acquired in large volumes in situations of this kind.
“We also do not see a large increase in the supply of commodities in the short term, so this trend of appreciation should continue.” added Kawakami.
US instability reflected in the world
Ferreira also pointed out a possible global concern with the continued increase of US inflation. Seeking a way to protect themselves from this phenomenon, many investors look to Brazil as an alternative, since materials are directly related to the values of basic products.
Levante Capital’s analysis team commented to InfoMoney, saying: “(…) despite some scares regarding inflation, the central banks of the United States and Europe must maintain the ‘stimulating’ monetary conditions. And in times of abundant money and zero or negative interest, one of the alternatives for investors around the world is to buy commodities to defend against the currency’s loss of value.”
In addition to troubled political relations, macroeconomic risks are connected to the potential growth of the country’s debt over GDP. Therefore, the team recommended an attentive view at this moment.
They said: “We were so cheap and so far behind that we ended up experiencing a confluence of benign factors: we are now in the best possible place to take advantage of a market that seeks to protect itself from inflation.”
Between banks
Kawakami also referred to the constant growth of banking institutions as one of the main factors that contributed to the boost in the stock exchange. Among the brands that have strengthened the most are:
- Banco do Brasil, up 8.3%
- Itaú Unibanco, up 5.2%
- Bradesco, up 5.4%
This can be explained by the increased dependence of companies on the big names, at least that is according to the banking sector analyst at XP Investments, Marcel Campos. Campos elaborated that this increase occurred despite the fall in the return on equity (ROE) of these groups, as a result of the Central Bank’s actions to encourage the growth of fintechs.
One fintech that has been gaining ground in the Brazilian market is Paylivre, a digital portfolio that facilitates electronic payments, deposits, and withdrawals on trading sites, binary options, forex and diversified investments in several countries. For example, many Brazilian users are able to access Deriv, through Paylivre, which has generated a revolution in the domestic market, bringing new possibilities and new markets to its audience.
Looking to the future
Brazil’s economy has been recovering gradually. And although it is neither an easy nor a quick process, each step is an important step forward. The year 2021, despite being difficult, still has the potential to be a productive year for the Brazilian economy.
Studies carried out by XP Investments led to the company revising its annual projection for the IBOVESPA for the end of 2021, increasing its forecast of 135 thousand points to 145 thousand. Bradesco BBI’s analysis team also followed the same path, pointing to an increase of 130 thousand points to 135 thousand.
The main factors that could explain these changes are the discreet accommodations in the country’s long-term interest rates and the increase in profit expectations of companies involved.
For XP Investments, this could mean a 199% increase in sales per share compared to 2020. If compared to 2019, this growth should still be 125%.
However, 2022 still appears to be a very cloudy landscape for some areas. Although projected earnings for this period are stable due to the normalisation of commodity prices and the weakening of the dollar, some companies are not willing to take any chances.
Bradesco BBI, in turn, still estimates an increase of 140 thousand points to 150 thousand for 2022, based on a supposed improvement in the economic scenario, a view shared by BNP Paribas.
However, Marcos Kawakami of BNP Paribas warns of a probable differentiation between companies, as had occurred between 2010 and 2016, a period in which the two extremes reigned in this environment.