Investors should get pickier with Brazil stocks as economic growth is set to cool and the nation heads toward a polarized presidential vote, says XP Inc.
The firm, one of Brazil’s largest brokerage firms, is targeting utilities with predictable cash flows and financial stocks, according to Raphael Figueredo, a senior equity strategist at the firm. It also favors homebuilders including Cury Construtora e Incorporadora SA and Direcional Engenharia SA, which benefit from government-backed housing programs for lower-income families.
“Having exposure to equities remains important. But this isn’t a call to buy the Ibovespa broadly,” said Figueiredo. “We need to be selective.”
That approach became increasingly important after Brazil’s benchmark equity index posted an eighth consecutive week of losses, its longest losing streak since at least 1989. XP also sees opportunities in companies with the ability to sustain dividend payments even as borrowing costs remain elevated.
One of XP’s highest-conviction calls is that Brazil’s economy is poised to slow sharply next year as the drivers of recent growth begin to fade.
Gross domestic product is expected to expand about 1.2% next year, down from 2% this year, as high interest rates and fading fiscal stimulus weigh on activity.
Whether that slowdown creates room for interest-rate cuts will depend on the fiscal signals sent by the administration that takes office after the election.
“That process could be more intense if it is not carried out in an orderly manner, alongside a fiscal adjustment, which would create room for the central bank to cut interest rates,” said Caio Megale, chief economist at XP, which had 1.5 trillion reais ($292 billion) in assets under custody at the end of March.
If the slowdown is disorderly, without clear fiscal signals, “we could see currency depreciation and more persistent inflation,” he added.