SAO PAULO, Oct 27 (Reuters) - Major fund managers in Brazil are getting picky about equities as skepticism grows about a third-straight year of broad gains on the São Paulo stock exchange.
The benchmark Bovespa index has soared 75 percent since the end of 2015, outpacing a 40 percent increase in emerging market stocks, on hopes that President Michel Temer’s agenda of labor and tax reforms would help bolster corporate profits.
The index reached new record highs this month, although it still lags its 2008 top in dollar and inflation-adjusted terms.
Investors who surfed the recent wave of easy money entering Brazilian equities are now getting skittish.
Fund managers GAP and Kondor, which have a combined 5 billion reais ($1.5 billion) under investment, said in recent letters to investors they were taking a more “selective” approach in stocks.
“Such fast gains have driven stocks with attractive stories to exaggerated levels,” Kondor fund manager Felipe Campos told Reuters. “We have to be careful in picking quality companies that will deliver on market expectations.”
His remarks suggest the rally in Brazilian stocks, which put them among the world’s best-performing assets this year, may shift down a gear as the country’s approaching 2018 presidential election threatens to stir volatility.
Clients of money managers also appear to be growing more selective.
Data from financial markets group Anbima showed that net inflows into index-linked stock funds plunged to 77 million reais so far this year, down from 473 million reais in the same period of 2016.
Net outflows have slowed dramatically at index funds with active management strategies, meanwhile. They total 94 million reais so far in 2017, compared to 283 million reais a year earlier.
To be sure, investors are still hoping for a fresh rally next year, especially if Brazil’s next president takes up some of Temer’s unfinished reforms. But some point to signs that stock prices are not entirely justified by the current outlook.
Reuters calculations show that two-thirds of the companies on the Bovespa index have been trading at higher forward price-to-earnings multiples than their 2016 average, a sign that earnings forecasts may be too low or stock prices too high.
Fund manager Rio Bravo Investimentos in September reduced its exposure to Itaú Unibanco Holding SA, Brazil’s largest lender, after share prices hit a record high as a multiple of expected earnings.
The bank’s efforts to curb defaults and increase lending spreads helped boost profits, lifting shares by 35 percent this year, but that trend is unlikely to continue, Rio Bravo said.
“We have opted for tactically reducing our position, waiting (and rooting) for a time when the balance between price and risk once again turns favorable,” Rio Bravo managers wrote in a monthly letter.
Kondor’s Campos cited water and sewage utility Cia de Saneamento de Minas Gerais SA as a strong pick due to potential annual dividends equal to around 8 percent of its share price.
Copasa, as the utility is known, is seen as way to invest in Brazil’s gradual economic recovery, but it has lagged other such shares, including consumer goods and retail companies.
$1 = 3.29 reais Reporting by Bruno Federowski; Editing by Brad Haynes and Tom Brown