- Nicholas McCarthy, chief investment officer of Itaú, assesses the Brazilian stock market with big eyes in 2022
- High and low interest rates are a likely factor in the current situation, as it will set the tone for opportunities in the market
- Itaú’s chief information officer is skeptical about a stronger Cilic escalation, but indicates the best paths for investors
(Isaac de Oliveira, exclusive to e-Investor) Nicholas McCarthy, who is in charge of the investment district at Brazil’s largest private bank, noted that the market is the best time for investors to spice up their portfolio a bit.
“The stock market is very cheap. Not only for Brazilian levels, but also all over the world,” says McCarthy. The executive estimates that the sectors most sensitive to high interest rates, such as technology, construction, and consumption, are the most sensitive. On the other hand, banks and commodities stand out.
High and low interest rates are a major factor in the current conditions, as they will determine the course of inflation and investors should be aware of the opportunities available. At last week’s meeting, Copom raised the price of Selic to 13.75% annually.
Itaú’s chief information officer is suspicious of a sharp rise in Selic’s rate. In the same way that Brazil’s central bank predicted the move and was one of the first to raise interest rates, McCarthy believes the country will take the lead in the cut. There is not a great chance that Brazil will have one of the first central banks to cut interest rates when the global scenario allows for that to happen, in the middle of next year, he says.
With inflation on the radar, the executive stresses, this can be a good ally in choosing fixed-income securities, which is darling for investors at this time of greater uncertainty. “If we’re wrong and inflation doesn’t actually go down, the investor is protected,” McCarthy says.
Read key excerpts from the interview:
Electronic Investor – Will the interest rate hike set the tone for the second half of the year?
Nicholas McCarthy – Brazil performed relatively well in the first half of the year, compared to the international market. The Central Bank of Brazil was ahead of the rest of the other countries in the process of raising interest rates. The world seems to have woken up and seen that inflation is going to be a topic that will make investors even more nervous, given the scale of the rally. With the rest of the world also entering this high interest rate movement, the global economy should slow down and Brazil will not escape this slowdown either.
Since we are already at the end of the rate hike process, there is a negligible chance that Brazil will have one of the first central banks to cut rates when the global scenario allows it to happen, in the middle of next year. In the same way that you moved interest at 2% inflation to 10%, we believe that interest at that level between 13% and 14% will lead to lower inflation.
What investment opportunities are you currently identifying?
McCarthy – There was a stock market crash last year. This year, the Ibovespa index rose by 10%, but then fell by 15%. There have been volatility and the index has been very close to zero for the year, versus the global stock market is down close to 20%. In this first semester, many people took the opportunity to make a little profit and invested in fixed income.
In the Brazilian market, where we are already approaching a real interest rate of 6%, the full share of tax-free securities, such as CRAs, CRIs, LCIs and LIGs, is a very important opportunity for clients. Whether it’s investors who have experienced nothing from a stock market crash or clients who have new resources to invest in these bonds for up to ten years.
What is your stock market prognosis?
McCarthy – The stock market is very cheap. Not only for Brazilian levels, but also all over the world. The Ibovespa index is approaching 100 thousand points, and at this level, investors are interested for a long time to hold their positions. If you don’t have anything in your wallet, it seems like a fun time to put a little money at risk.
We think Ibovespa will only really start moving when people see that at some point, even 12 or 18 months from now, there will be a possibility of lower interest rates. As long as this isn’t clear, the bag won’t move very far.
Is fixed income a way out until then?
McCarthy – In the short term, the fixed income opportunities are in exempt securities and we are very fond of inflation-correlated assets. If we’re wrong and inflation doesn’t actually go down, the investor is protected. I’m not talking about a fixed income CDI and a one year period. The interesting thing is that it will last longer because at some point inflation will subside and interest rates will have a significant opportunity to fall. Investors should be thinking a bit more about the mid-term and not so much about CDI, which it is now.
uA recent survey by Ita showed heirs’ interest in investing in start-ups, as well as family businesses. Will this strengthen or diminish with the recent global crisis in the sector?
McCarthy – This is a type of product that needs an investment horizon of at least five years. For people with high incomes, it is a permanent interest, as it is a way to transfer some capital to companies that are just starting out. We do not believe that this interest will disappear.
When interest rates are very low, it is easier for these companies to make the rounds of capital and raise money than it is when interest rates are really high, like in Brazil, or when they start to rise. They also suffer from this high interest rate because they need the money to maintain and make their business viable.
There is a process of repricing global assets and the companies that are in the best position will survive. The important thing for anyone when buying or investing in this is to not look too much into the short term and try to look more at who the manager is.
McCarthy – No manager makes mistakes. Everyone makes mistakes. People believe that money is made in this buying and selling movement. The important thing is to balance that, having a little more fixed income, then a little less, with a little bit more variable income, then less. Over time, you can pick up on that, knowing that you will have very good years and very bad years.
Given that the Brazilian stock market is discounted, what sectors are interesting?
McCarthy – We prefer to recommend the stock exchange as a whole rather than a specific sector. Typically our allocation is 75% via the managers and 25% via the index, as this gives more movement to the entry and exit with a certain flexibility.
All sectors most closely correlated with interest rates suffered the most, such as consumption, construction and technology. On the other hand, the banking sector suffers a little less from higher interest rates. goods too.
Why would you prefer to recommend through managers?
McCarthy – Because managers have tasks that 99% of people don’t. They are required to read companies’ balance sheets diligently. Individuals do not do this. They have the function of seeing the expected economic moment. Managers are likely to already consider when it will be possible to cut the interest rate in Brazil and what sectors will benefit as a result. Individuals, in general, have neither the time, nor the agenda, nor the means to do so.
Now, funds are going through a time when they are offering lower returns than indexes. But it is part. What the manager is trying to show his clients is that there is no point in looking at them for a year or two. This is the process of sustaining capital for inheritance and future generations and for them to be able to retire with peace of mind.
In the case of commodities, whose sector is one of the most important in the stock market, do you think it has reached the end of the bullish cycle or is there still room for further progress?
McCarthy – These commodity cycles are a bit longer, closer to five years. It has been the United States that has led global growth in the past ten years. There seems to be a chance that the rest of the world is looking to grow a little bit more and that the US will slow down a bit. When this happens, there is a new investment cycle and this leads to an increase in the purchasing power of emerging nations, as well as the consumption of food and commodities such as oil, crude, and minerals.
I don’t think the commodities are going to go up much more, but I do think their cycle is a little bit longer. Now, the market is exaggerating. It rises a lot, then falls and stays in this back and forth. This is an interesting sector looking forward.
How should investors position themselves with regard to volatility, given the elections in the domestic scenario, the risk of recession abroad and the continuing war in Ukraine?
McCarthy – The investor should have a site that sleeps well. Whether it is 10% of the stock exchange, exchange or fixed income. Go from a position in which you feel comfortable to being able to get through a period of greater fluctuations, but be aware that in these moments there are usually many opportunities as well. If the bag is cheap, buy some. If it goes up, sell a little more than you bought. It is interesting to make small movements.
Anxiety gets in the way. We don’t think today’s Brazilian swings are very different from traditional swings. In fact, the international market is more volatile than the traditional market.
However, is it interesting to keep orders abroad with this scenario?
McCarthy – It is always exciting to have international experience over time. If you have nothing and are going to start now, the moment will be even more delicate. But an international presence is important to everyone.
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