Bradesco BBI kept a neutral view on the Brazilian stock market and warned of a possible value trap. Analysts Pedro Grimaldi and Ben Laidler said stocks look cheap again, but the reason may be the wrong one. The discount reflects a higher cost of capital rather than deteriorating earnings, they argued.
Cheap for the wrong reason
The Brazilian market trades at 7.7 times forward earnings, a 25 percent discount to its historical average. MSCI Brazil has fallen roughly 30 percent from its September highs, following Lula’s re-election. Stocks seem cheap again, but perhaps for the wrong reason, the analysts wrote.
The yield curve has shifted sharply. It moved from pricing Selic cuts to pricing about 50 basis points of rate hikes through end-2027. The Selic benchmark stands at 13.75 percent per year.
Lessons from twelve markets
Bradesco BBI studied 12 global markets previously considered value traps, including Japan, South Korea, Greece, India, Indonesia, Mexico, the United Kingdom and Brazil in earlier cycles. In past cases, repricings took 12 to 24 months to consolidate.
The firm projects a return on equity of 19.5 percent for the Brazilian market. It puts the equity risk premium at 5.2 percentage points over the real interest rate, with a dividend yield of about 8 percent.
What would change the view
The bank listed conditions for a more constructive stance. These include a 2027 primary surplus target of at least 0.25 percent of GDP, a resumption of Selic cuts, inflation expectations below 4.5 percent and a lower FX risk premium. Gross public debt, at about 83 percent of GDP, is a concern; a level of 85 percent could prompt more caution before mid-2027.
Bradesco BBI keeps a defensive portfolio unchanged. Its main positions include Embraer, Suzano, JBS, WEG, Axia, Sabesp, BB Seguridade and Cury.
Related: Brazil stocks lose R$963 billion after Lula re-election
Source: Bradesco BBI
