It may be time to place a bet on Brazil
Investors have ample reason to be sour on Brazil. Falling commodity demand from China combined with overly indebted consumers at home has helped slice the country’s annual economic growth rate from 7.5% to 2.5% over the past three years. And while the S&P 500 has racked up a 22% gain so far this year, Brazil’s benchmark Bovespa stock index has fallen by 12%. But some market observers say the selloff has created bargains. And a recently announced change to the way in which the Bovespa will be calculated could give an additional boost to high-quality stocks — creating a rare buying opportunity.
Since the Bovespa’s inception 45 years ago, the main determinant of a stock’s weighting in the index has been its trading volume. As a result, heavily traded, low-quality stocks have enjoyed a disproportionate influence, as evidenced recently by oil company OGX, controlled by embattled tycoon Eike Batista. The heavy trading in OGX stock in the weeks leading up to its late-October bankruptcy filing caused its Bovespa weighting to actually increase to 5%, even as the stock price tanked by 95%. A new weighting methodology, which takes full effect in May 2014, will de-emphasize trading volume in favor of a company’s market capitalization — in essence, boosting the importance of large-cap, high-quality companies and attracting additional investor flows to them.
Credit Suisse analyst Andrew Campbell has forecasted the stocks that he believes will benefit most when the changes fully kick in. Topping the list is Itaú Unibanco, Latin America’s largest nongovernment bank. Campbell figures that the stock’s Bovespa weighting could shoot up to 8%, from 4.5% today. The company’s most recent quarterly earnings rose at the fastest pace in two years, an annualized 18%, thanks in large part to management’s efforts to focus on less risky loan segments. Deutsche Bank analyst Mario Pierry, who has a buy rating on the stock, believes that the shares could rise by more than 20% over the next 12 months.
Shares of Vale, the world’s largest supplier of iron ore, could constitute 5.5% of the Bovespa in 2014, up from 2.6% today. Goldman Sachs analyst Marcelo Aguiar, who has a buy rating on the stock, believes that iron ore prices could stabilize above the current level of about $135 per ton and even spike as high as $150 per ton over the next few months. And Aguiar expects Vale’s dividend yield to top 3.5% in 2014.
Ambev, the giant beer producer, could see its Bovespa weighting almost triple in 2014, to 4.2%. Bank of America Merrill Lynch analyst Fernando Ferreira expects Ambev’s revenues and earnings per share to increase by 12% and 33%, respectively, in 2014, as the company continues to hike prices on its premium beer brands. He also projects that Ambev will raise its dividend yield to a generous 5.3%. That’s a payout worth toasting in any market environment.
A former compensation consultant, Janice Revell has been writing about personal finance since 2000.
This story is from the December 09, 2013 issue of Fortune.