IPSA Target - Adjusting projections to 5,800 points (+10%)
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In a complex start to the year for risk assets, the IPSA managed to distance itself from global markets affected by expectations of rate hikes by the FED and the recent global geopolitical conflict.
The higher performance of the IPSA so far this year (+30% in USD vs. +21% for the MSCI Latam and -14% for the MSCI World), is mainly explained by the strength of commodities and its "more value" composition, a characteristic shared by the rest of the stock markets in the region."a characteristic shared by the rest of the region's stock markets, which has favored higher investment flows.
Although the domestic scenario will continue to be complex due to the political and institutional challenges we face in the coming months (largely already incorporated in the widely discounted valuations), the external scenario offers some compensation, given the attractive prices of copper and raw materials in general (iron, cellulose, lithium), the external scenario offers some compensation, given the attractive prices of copper and raw materials in general (iron, cellulose, lithium).
The dynamics of corporate results continue to be extremely positive. The 1Q22 results have largely surpassed consensus estimates. Surprise of +8% in sales and +15% in earnings, with +44% growth in sales and EBITDA.
Otherwise, positive earnings surprises are at record highs (above 50%). This has translated into additional earnings revisions for fiscal 2022 and 2023 (+10% in the last week for 2022 and 2023).. So far this year expected earnings have been revised upwards by 37% for 2022 and 34% for 2023.
We also highlight the attractive dividend yield offered by the local stock market (+7.0% 12m fwd), with several companies with double-digit dividend returns for 2023.
However, despite the IPSA's outstanding performance so far in 2022, in contrast to global equities, we see room for further recovery in a context of valuations that remain attractive both in absolute terms and relative to emerging markets and corporate results that continue to surprise on the upside.
In this context, we are revising upwards our IPSA target to 5,800 points +10% (previously 5,300). The exceptional earnings context has translated into ROEs well above their historical averages (+20%). We assume that these are not sustainable for the medium term, so we incorporate yields close to 15% for the next 12 months and a gradual convergence to long-term averages of 11%. This offsets higher interest rates, which, added to institutional political risks, would keep valuations under pressure (we target a P/B multiple of 1.35x, which is still conservative for history). An IPSA at 5,800 points would also be consistent with closing the discount gap we have with emerging markets (10%), an equally conservative scenario considering that historically we trade at a 30% premium.
We favor stocks that we find undervalued (value), of quality (solid financial position), and growth potential. Sectorially we are favoring the commodities, banks and consumer sectors.
Our Fynsa Total Return Fund provides exposure to local equities through an active and high conviction strategy that maximizes Alpha generation. The fund has accumulated a +33% return so far this year, outperforming the IPSA by 11%..
