The Brazilian stock market was seen as a seesaw this October and the race for the presidency is believed to be the main reason behind the move. The performance of Ibovespa and its shares seems to have made investor preferences clear. The narrow firstround margin between Luiz Inácio Lula da Silva (PT) and reelection candidate Jair Bolsonaro (PL) left the market in euphoria for the first week of the month. Now, in the latter, with new controversy surrounding the current president and polls pointing to Lula’s victory, he gave back a good chunk of the winnings.
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Those who invest in B3’s (B3SA3) treasury stock have been following these swings and wondering whether or not the end of the presidential race can unlock the stock’s value. This question occupied many analysts and managers infomoney rather answer only after the voting decision on Sunday.
Pedro Gonzaga, partner and analyst at Mantaro Capital, a variable income manager, admits there’s no onesizefitsall answer to this question. “One can assume that just passing this milestone, i.e. the second ballot, can be enough for a better flow on the capital market in Brazil,” he says.
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The implications tend to vary, yes, depending on which candidate is elected. “With the incumbent president adopting a more liberal tone, we can expect greater optimism from stateowned companies if reelected. This is relevant for B3 as Petrobras (PETR3; PETR4) is one of the top stocks. A major revaluation of paper can generate greater flow and tends to benefit the exchange’s business,” says Gonzaga.
On the other hand, Lula’s choice might be more advantageous in attracting foreign capital.
“While it’s difficult to confirm the average foreign investor’s preference, some recent feedback suggests greater receptivity to Lula’s choice. So it’s possible that with the profit, a larger foreign stream will come to the stock market,” says the Mantaro partner.
Anyhow, Gonzaga says Brazil’s picture relative to the world is good, with inflation slowing, interest rates falling and gross domestic product (GDP) growing.
“One way to have direct exposure to all of this is B3’s own stock, which tracks the appreciation of publicly traded companies due to growth in trading volume, whether in equities or other markets it operates, including fixed income and derivatives,” says Gonzaga.
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“The stock is attractive and probably one of the best names to trade with the best sentiment in the Brazilian markets in the coming months,” says BTG Pactual, which recently revised the stock’s price target from R$14 to R$18 by the end of 2023 has raised , with a buy recommendation.
The bank estimates that after a month of July that was weak in terms of volume, there was a recovery in the following months. Corporate capitalization also ended the quarter above BTG’s forecasts, with the Ibovespa reading around 110,000 points (the bank expected 102,000 points).
The movement of foreigners in the B3 markets regained momentum in October. As of last Wednesday (26th), inflow for the month was positive at R$10.533 billion. In September, this balance was barely negative purchases exceeded sales by only R$585.3 million.
Goldman Sachs calculates that the completion of the election could free up as much as $30 billion in assets under management from global funds and $20 billion from local funds.
Different views on the same paper
Earlier this month, after two consecutive days of bullish markets after the first round of voting, Itaú BBA raised marketperform’s recommendation for B3SA3 shares (performance in line with market average, in line with neutral recommendation) Outperform (performance above market average, corresponds to a purchase recommendation). The house set a target price of BRL 18 for the stock by the end of 2023, compared to BRL 13 by the end of 2022.
The house reasoned that it made the decision with better expectations for the outcome and a “positive reappraisal of the multiples ahead”. With the new rating, BBA reported that it raised B3’s revenue forecasts by 1% and 5% for this year and next, respectively. The house also forecasts a 9% gain next year at R$5.8 billion.
Itaú BBA believes that the movement in the stock market seen after the first round can be repeated with the outcome of the elections. “Assuming the trend continues, B3 will have more business and our previous estimates (and consensus) in this case have been overly pessimistic,” read the house report, signed by Pedro Leduc, William Barranjard and Mateus Raffaelli.
“Furthermore, we also expect tighter cost controls in 2023, with cost management becoming a key issue at B3. This increases operational leverage while the winds favor sales,” reads the analysis.
Following the same path, Santander upgraded the paper’s rating to ‘buy’ and also increased the price target to R$18 from R$13. The house believes that a more constructive political environment in 2023 could increase the stock’s average negotiation volume Exchange to R$ 33 billion per day.
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According to Santander’s calculations, every BRL 5 billion increase in daily turnover means a BRL 2 increase in the stock’s price target.
Safra’s analysis team decided to downgrade B3SA3’s recommendation following the rally after the first round of the week. The house assessed that the newspaper had performed well throughout the year with an increase in value of almost 30%, outperforming the Ibovespa. That way, the stock would have had limited upside potential, according to Safra analysts.
Despite the downgrade, the bank rates B3SA3 as a resilient investment due to the company’s supremacy in providing infrastructure for financial market operations with a diversified business model. In light of this, the bank raised the price target of the paper from R$ 15 to R$ 16 by the end of 2022.
Safra also expects B3 to show cash flow generation and a balance in its financial part, allowing it to pay good dividends.
“We expect B3 to pay a dividend yield of 6.4% in 2022 and 5.7% in 2023,” the bank’s report said.
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B3 will release its quarterly results on November 10th. The average of Refinitv’s market forecasts indicates a reported net profit of R$1.165 billion over the period, virtually stable compared to that achieved a year earlier (R$1.176 billion).
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