Goldman Sachs sees Brazilian shares as cheap and the country as "overweight"

Goldman Sachs strategists stated that Brazil remains their preferred stock market in Latin America, with an "overweight" recommendation in the emerging markets portfolio.

"In our assessment, at current levels, with Brazilian shares trading at around 8 times projected earnings for the next 12 months (future P/L), the market appears cheap both in relation to long-term interest rates and the patterns observed in previous cycles of falling interest rates", they stated, in a report to clients this Wednesday (1st).

"Although volatility may increase in the second half of the year, as the elections approach, any relief from the more aggressive repricing of interest rate expectations resulting from the reduction in energy prices tends to favor the more interest-sensitive domestic stocks, which have fallen year-to-date and are still around 20% below pre-conflict levels," they added.

The American bank's emerging markets equity strategy team highlighted that the Ibovespa had a very strong performance at the beginning of the year, driven by the entry of foreign investors into local stocks, accumulating an appreciation of more than 20% by mid-April.

The start of the cycle of interest cuts by the Central Bank in March endorsed the movement, especially favoring sectors more sensitive to interest rates, they said, adding that the energy sector subsequently gained strength as the war between the United States and Iran raised oil prices, benefiting companies that export the commodity.

Since April, however, the market has given back most of these gains, with the year-to-date increase now at less than 7%, which the Goldman Sachs team attributes to macroeconomic concerns, including the prospect of a shorter-than-expected monetary easing cycle - currently, the interest rate market is pricing in no rate cuts over the next 12 months, compared with around 300 basis points of cuts expected before the war.

Increased political uncertainty with October's presidential elections and the reversal of flows to the energy sector following the fall in oil prices are also cited in the report signed by Sunil Koul, Kamakshya Trivedi, Timothy Moe, Tarun Lalwani and Mambuna Njie.

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"In the short term, we suggest that investors position themselves in high-quality domestic cyclical companies such as defensive banks, utility companies, telecom operators, low-income real estate companies, and some low-cost retailers. We believe these companies have strong fundamentals regardless of the outcome of the election."

In Latin America, strategists said they maintained a neutral stance on Mexico, citing a weak growth scenario from both a macroeconomic and microeconomic perspective.

"In addition, the investment environment is expected to continue to be affected by internal and external uncertainties, especially regarding the direction of United States trade policy and the review of the USMCA trade agreement."

They also stated that they maintained a neutral position towards Colombia, despite the election results, considered favorable to the market, earlier this month.

"We assess that the Colombian stock market remains vulnerable to a correction after the strong rise recorded before the election, in a context of resumption of the cycle of rising interest rates and medium-term fiscal concerns, aggravated by the risks of implementing the new government's policies."

Source: CNN