After a period of hyper-elastic inflation, price increases are showing signs of abating. The IPCA for July showed contraction (albeit with compressed cores), as did the IPCA-15 in August. The day before, Roberto Campos Neto, head of the central bank, said lower energy prices could bring inflation down from 9% to 5% or 4% annually.
This shift has been closely watched by investors and market analysts, including the growing debate over the rotation from value stocks (such as commodities) to developing stocks (such as retailers and technology).
With that in mind, the XP Analysis team formed by equity strategist Jenny Lee and quantitative analysts Julia Aquino and Thales Carmo conducted a quantitative study to identify the Brazilian assets most sensitive to inflation, as measured by the IPCA’s monthly divergence.
Analysts have sought to find gainers on both sides — those that benefit from higher inflation and those that benefit from lower prices — by analyzing the relationship between returns and IPCA, and controlling for potential distortions through market exposure.
In the study, analysts point out that in general, consumer discretionary firms tend to benefit more from lower inflation, while core and financial consumption do well in the opposite scenario.
To get to the list of names, the team analyzed monthly returns in the past 10 years (between June 2012 and June 2022) for the stocks that are part of Ibovespa, with the exception of some names that later entered the Brazilian stock exchange.
“The last five names are those that correlate negatively with the IPCA monthly change in this period, i.e. stocks that tend to generate positive returns when prices fall. The more negative this beta (how two assets are related), the greater the impact of inflation on the securities”
Among the assets on the list that benefited most from lower inflation are mainly retail and consumer stocks, such as Americanas (AMER3), Magazine Luiza (MGLU3), Petz (PETZ3), Via (VIIA3) and Natura & Co (NTCO3).
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XP retail and consumer analysts point out that growth stories suffer the most when inflation is high, and therefore tend to be in the well-performing category when prices are low.
They highlight that in an environment with high inflation, more discretionary companies (eg cosmetics) and/or higher ticket categories (eg durable goods) tend to suffer because (i) they reduce consumers’ purchasing power, causing them to lower discretionary priority. Categories; (2) It is generally associated with higher interest rates, which in turn increases financing costs; and (iii) names related to growth and/or technology (eg PETZ3, AMER3, MGLU3, VIIA3) suffer more from higher interest rates due to their longer tenure, that is, they are more sensitive to changes in interest rates.
“So, in the scenario where the opposite happens — lower inflation, and therefore interest rates as well — this class of retail businesses tends to show the biggest signs of recovery,” they point out.
Stocks that benefit from high inflation
Regarding the last five names with the highest positive correlation with the IPCA monthly variance, analysts indicate that they belong to sectors that meet at least one of the three criteria: 1) they managed to outpace the price hike; 2) They can benefit from the subsequent cycle of higher interest rates, such as banks and 3) have margin expansion with higher rates, as they have inflation-linked contracts, such as shopping malls.
The listed stocks with the highest beta relative to inflation are the following: Assaí (ASAI3), Iguatemi (IGTI11), Carrefour Brasil (CRFB3), Santander Brasil (SANB11) and Multiplan (MULT3).
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With regard to companies that sell food, such as Assaí and Carrefour, analysts point out that they can act as a buffer in the midst of an inflationary environment. Although generally subject to disposable household income and consumer confidence indicators, food retailing tends to be a more defensive alternative in this area. Food is one of the categories, if not the most, essential to human survival, and therefore it is the last of the categories to be reduced. In addition, inflation is often fully transferred to prices by all firms in the sector, because they already operate with tight margins and have low demand and price elasticity.
“In addition, the Atacarejo format is safer between food segments, as it offers the best cost/benefit ratio and, therefore, tends to gain market share as consumers look for more affordable alternatives,” note the analysts. Assaí is the only Atacarejo player on the stock exchange, while Carrefour has a significant exposure (about 70% of Ebitda, or EBITDA) to the formula through its Atacadão logo.
In Santander’s case, the combination of large Brazilian banks’ net positive interest rate exposure and their resilient and profitable financial performance often causes investors to see their stocks as a safe haven during periods of inflation, according to analysts. In addition, Santander has the lowest current interbank trading liquidity, which can amplify volatility in its share price.
Finally, with regard to malls, analysts note that high inflation has a positive effect on rents in Multiplan and Iguatemi, since rental income, which represents between 70% and 80% of total revenue, is related to IGP-DI and IGP-M. This leads investors to see them as hedge or collar (protection) during periods of high inflation. Moreover, inflation also benefits mall owners because replacement costs increase, which would benefit mall owners. evaluation out of the wallet,” they reside.
However, it should be noted that malls are also an investment case in times of calming inflation, and thus, the subsequent decline in Selic, as JPMorgan raised its recommendation for Iguatemi and brMalls (BRML3) with a focus on the lower interest rate scenario. Analysts point out that lower interest rates will benefit the sector through multiple adjustment and increased cash flow as measured by FFO (Funds from Operations).
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