Emerging economies are more attractive and Brazil is too cheap to ignore, says XP

RIO DE JANEIRO, BRAZIL – Despite the Ibovespa rally in the first months of the year, XP maintains optimism about the variable income market in Brazil, which it still considers too cheap. The analysis is part of the Global Allocation Perspectives report, which has a neutral view on the United States, Europe, China, and Japan. Like Brazil, emerging markets are also considered attractive, according to the XP study.

The beginning of 2022 was marked by the conflict between Russia and Ukraine – which lasted longer than initially expected – and the beginning of interest rate hikes in the United States amid inflation that gained strength with the rise in commodity prices.

In addition, Covid-19 continued to bring new waves of concern, heavily affecting China, facing the largest disease outbreak since 2020. The scenario also raised the pressure on supply chains.

“Despite the international scenario still quite uncertain, we reinforce the structural need for exposure to international investments,” points out XP’s report, which advocates regional diversification in the search for good opportunities.

The brokerage house shares the analysts’ favorite regions amidst the global uncertainties in the study. Brazil and the emerging markets stand out with an attractive vision for investments.

BRAZIL: TOO CHEAP TO IGNORE, SAYS XP

Despite concerns about the conflict in Ukraine and the risks of a tighter monetary policy amid soaring energy and food commodity prices, Ibovespa rose 14% in the first quarter in reais and 35% in dollars.

According to the XP report, the Brazilian stock market benefited from factors such as the country’s exposure to commodities and banks, the flow of other markets to Brazil, and the stock values of companies still highly discounted, despite the rally at the beginning of the year.

In a report, the brokerage house considers that commodities sectors and banks rose almost 20%, while the other sectors and small caps companies lagged behind.

For XP, the performance of segments that did not follow the Ibovespa rally in early 2022 reinforces the thesis that many companies are being traded at a discount on the Brazilian Stock Exchange and may represent opportunities, especially for those who focus on the long term.

“We recognize that the domestic macroeconomic scenario is still challenging, with inflation and interest rates still rising, and a GDP growth projection close to 0% for 2022,” XP’s study warns. “For long-term investors, there are many good discounted opportunities that can be exploited by good active management,” it suggests.

PORTFOLIO DIVERSIFICATION

Even in a still quite uncertain international scenario, the Global Allocation Perspectives report signals the need for exposure to international investments.

“When we concentrate portfolios in Brazilian assets, we are very exposed to local risks,” he explains. “In case of an increase in the perception of domestic risks, such as political or fiscal, all Brazilian assets tend to react negatively,” warns XP’s report.

The brokerage house also reminds us that domestic events have little influence on international markets. Thus, the analysts of the brokerage firm highlight that the best strategy to protect oneself from volatility in Brazil is to diversify the portfolio in other regions and currencies.

Currently, the United States represents more than 60% of global stocks, followed by Japan, which makes up 5.4% of the global market, and the United Kingdom, which equals 3.7%. On the other hand, Brazil represents less than 1% of all stocks traded worldwide.

EMERGING MARKETS

The XP analysts have a positive vision for emerging markets, which, like Brazil, have been growing, driven by commodities prices and attractive prices of local companies.

The analysis, however, refers mainly to the emerging countries of Latin America, which are showing a movement of high interest rates, with the stock exchanges and exchange registering the best global performances.

“Latin American countries have already started to raise interest rates in 2021; that is, the attractiveness may continue increasing,” signals XP. “For emerging Europe, we have a similar view to Europe in general, with a slightly more negative outlook because of the more direct exposure to the conflict in Ukraine,” the document points out.

EUROPE

The uncertain scenario in Europe – especially concerning the geopolitical crisis in Ukraine that has not yet been solved – motivated a neutral position of XP for the region but with a negative bias.

The Eurozone started the year with a positive outlook amid accelerating global economic recovery. Before the war in Ukraine, economists projected solid economic growth of nearly 4% in 2022. In addition, the pandemic crisis and a change in leadership in Germany – previously a leading proponent of austerity measures on spending – led to a loosening of fiscal policy in the region.

After February, when the war between Russia and Ukraine materialized, the outlook for Europe worsened, given the region’s greater exposure to the conflict than other markets.

“The enormous energy dependence of European countries on Russia and the impossibility of a solution in the short term led to record inflation since the Eurozone was created,” details the XP report.

Thus, the XP analysts evaluate that, with pressured prices and a more fragile economy than the United States, the European Central Bank has signaled more caution to raise interest rates than the Americans.

THE UNITED STATES

Before the pandemic, the United States had one of the best decades of returns in its history – between 2009 and 2019, the S&P 500 index accumulated a total dollar gain of 257%. Not even the pandemic stopped the US market, which continued to favor the growth of big techs and delivered a 109% return since March 2020.

According to XP analysts, the strong appreciation generated doubts about performance maintenance throughout 2022.

“In the long term, there is no doubt that the United States remains an important market for a Brazilian investor to have exposure to,” suggests the brokerage firm’s study. “However, in the shorter time frame, expectations have been adjusted downward, with more moderate corporate earnings growth estimates,” it points out.

Still, XP forecasts 16% growth for North American companies this year – the highest among major global regions.

Because of this, the brokerage house has a neutral view of the country and gives preference to assets linked to segments that perform better in times of higher inflation, such as energy, the financial sector, and health.

CHINA AND JAPAN

China had a very turbulent last year and a half, with investors worried about the regulation of several sectors, fears of delisting Chinese companies from the New York stock exchanges, the real estate crisis, the return of Covid-19, and the deceleration of economic growth.

The difficulties of the period led the Chinese equity market to have the worst performance among the major global stock markets. Since 2021, the MSCI China index has fallen by -22% in dollars.

For XP, the Asian country – considered the engine of global growth – remains attractive for the long term but, in the short term, still requires caution from investors.

“In the short term, we still see risks,” points out the brokerage report. “Although the authorities have brought relief to investors, more concrete policies to address their concerns still need to be made,” it points out.

In Japan’s case, concerns lie in problems in global supply chains generated by the war in Ukraine and lockdowns in China.

“Despite the low exposure to Russia, inflation is a challenge given the importance of the manufacturing sector, which should come under pressure from rising commodity prices,” the report projects. “We see few catalysts in this region and prefer exposure to other markets with better growth prospects,” it concludes.

With information from InfoMoney