Fiscal policy will dictate the pace of the Brazilian stock exchange in 2023, say analysts

Market analysts believe that the performance of the Brazilian Stock Exchange in 2023 will be mainly conditioned by the flight plan of the Luiz Inácio Lula da Silva (PT) government in the fiscal field.

Foreign investors, who since the presidential race have already shown greater optimism with a new PT mandate compared to market agents in Brazil, have a more favorable view on the conduct of the government’s economic policy next year, which leads them to to project a more outstanding performance of the shares.

Calculations by international banks Bank of America (BofA) and JPMorgan project the Ibovespa stock index at 135,000 and 130,000 points in December of next year, respectively. On Friday (16), the index closed business at 102,855 points, with a 1.9% drop in the accumulated result for the year.

The “gringos” bet that, despite the noise, the economic team of the elected government will present some fiscal rule in place of the spending ceiling that will be able to control the growth trajectory of the public debt, which will make room for the fall of inflation and the Selic rate. In this scenario expected ahead, the drop in interest rates could lead to a repricing of shares on the Stock Exchange.

In the case of local investors, the view is much more cautious. Banco Inter and Genial Investimentos are among the most pessimistic houses, with estimates that point to the main stock index of the Brazilian Stock Exchange at 118 thousand and 109.7 thousand points at the end of 2023, as they believe that the fiscal risk will not allow the BC (Central Bank) to start the cycle of cutting the Selic rate so early, preventing an upward adjustment in stock prices.

Selic down, Stock Exchange up

More optimistic about the Brazilian market in 2023, the team of analysts at BofA says that the base scenario with which it works assumes “some kind of fiscal anchor”, with the Selic rate ending next year at 10.50%, a drop of 3.25 percentage points compared to the current 13.75% per annum.

Along the same lines, JPMorgan states that the expected appreciation for the Ibovespa in 2023 is largely due to the expectation of a 2.25-point cut in the Selic over the next 12 months, with the interest rate at 11.50 % at the end of 2023.

“Although there is significant noise at the moment that makes it difficult to see what the new government’s fiscal policy will be, there is a reasonable chance of some kind of fiscal arrangement, which allows a scenario of lower interest rates to be achieved through a combination of pressure from the market and from Congress”, point out JPMorgan analysts, who also do not rule out a tax increase to compensate for the expected increase in government spending.

BofA analysts also point out that the rotation of shares to fixed income in recent months, and an eventual reversal of this trend with the drop in the Selic rate, could favor the performance of the Brazilian Stock Exchange next year.

In this scenario, the foreign flow to the shares, which has been strong throughout 2022, with a positive balance of R$ 110 billion in the accumulated result for the year, until December 14, may contribute to sustaining an appreciation of the Ibovespa, say specialists at the Ibovespa BofA.

They also predict that the growth of the country’s economy in 2023 —the American bank estimates an expansion of 0.9% in Brazil’s GDP (Gross Domestic Product) next year— will provide the necessary conditions for an increase in the profits of companies with shares traded on B3.

“We expect the companies on the Ibovespa to successfully increase profits over the next two years”, say BofA analysts.

They point to commodity exporters Vale, Gerdau, SLC Agrícola and PetroReconcavo among the stocks that may stand out positively in 2023, in a scenario of economic reopening in China, bottlenecks in the supply chain in the wake of the War in Ukraine and a strong dollar because of of the highest interest rates in the United States.

Itaú, Banco do Brasil and BTG are also cited by BofA analysts as names seen with good eyes, although not with the same attractiveness that they offered at the beginning of this year.

JPMorgan, in turn, sees Natura as a stock with high potential for appreciation, with an increase in consumption driven by social benefits that could make room for an increase in the company’s revenues. Gol, on the other hand, is a name to be avoided, in an unfavorable global macroeconomic environment, with fuel prices and the dollar on the rise, say analysts at JPMorgan.

Genial predicts Selic between 14% and 15% in 2023 to compensate for the deterioration of the fiscal framework

With a much less optimistic view than the global peers, the equity strategist at Genial Filipe Villegas says that, given the expected fiscal deterioration for the country as a result of increased expenses above the spending ceiling, the BC will be forced to resume the cycle increase in the Selic rate to control the inflation expectations of market agents.

“Before the elections, our baseline scenario was a fall in interest rates in the second quarter or in the second half of 2023. Now, we move to an expectation of high interest rates”, says Villegas.

He says that the Selic rate could reach levels between 14% and 15% over the next year, which should contain a more expressive rise on the Stock Exchange, either because of the attractiveness of fixed income, which will remain high, or because of the fair value projected by the market analysts for the stock that will continue under pressure.

Genial’s stock strategist says that, in a scenario of economic activity negatively impacted by high interest rates, he has a preference on the Stock Exchange for basic consumption papers, such as supermarket chains. “We really like the supermarket sector, which, in the face of weaker economic activity, should show greater resilience.”

Villegas also says that the profile of the elected governors of São Paulo (Tarcísio de Freitas), Minas Gerais (Romeu Zema) and Paraná (Ratinho Jr.), gives a positive view to the actions of state-owned companies Sabesp, Cemig, Copasa, Sanepar and Copel .

“We see a greater probability of these companies being privatized in the coming years, given the profile of the elected governors”, says the strategist, adding that the search for additional revenues may also weigh in favor of privatizations in the states.

Companies in the electricity sector, whose contracts are indexed to the IPCA and the IGP-M and can benefit from inflation that, although decelerating, will continue at a high level, are cited by Banco Inter analysts among the opportunities seen for Brazilian scholarship in 2023.

“In the insurance business, we can see a normalization of operations and loss ratio contributing positively to the results, along with greater financial income”, say analysts from Banco Inter, who also mention among the preferences for 2023 the agricultural sector, resilient even in moments of global slowdown, and that of paper and cellulose, still favored by supply shocks on the European continent.