If Brazil's central bank slashes interest rates Wednesday, bank and consumer stocks could soar.
"If you look at what happened the last time rates were cut a few months ago, banks rallied across the board," says Maclovio Pina, a senior analyst at Morningstar who covers international banks.
This could be Brazil’s second recent rate cut. In September, it ended its seven-month tightening cycle.
Like other big emerging-market economies, Brazil had been keeping rates high to prevent its economy from overheating. With its economy continuing to soften, and with global markets deteriorating further, market watchers predict another rate reduction — even with inflation at about 7.31 percent (above Brazil’s reported 6.5 percent goal).
"The government is very worried about the crisis outside of Brazil and the economy has shown signs of deceleration, so the government sees it as an opportunity to lower rates," says Flavia Montoro, an analyst with BlackRock's Latin American equity team in Sao Paulo. "We think if it's a 50 basis points cut it will be positive. And normally it's good for the stock exchange."
Brazil surprised the markets in September by chopping interest rates half a percentage point, to 12 percent. The Bovespa equity index closed up 2.9 percent with gains by shares in the consumer and banking sectors. Bospeva lists stocks from BRF Foods , Cosan, JBS and Marfrig in the food processors space, and cleaning production company Natura and tobacco name Souza Cruz .
Retail names in the homebuilding space saw a boost, with Gafisa rising 3.26 percent and Rossi Residencial up 0.6 percent. Banco Bradesco added on 7.4 percent, and Banco Santander Brasil rose 4.5 percent.
Not all banking stocks will benefit from higher loan demand as a result of the rate cut, according to Morningstar's Pina. Rather, banks with the widest distribution and branch networks will be winners, including publicly traded and government-controlled Banco do Brasil , Itau , Unibanco , Bradescoand Banco Santander, the Brazilian subsidiary of the Spanish bank.
In the long-term, Pina likes Banco Santander because of its risk-reward proposition and financial stability.
"It’s trading at a much lower valuation [and] at a higher discount first and foremost to the company's fair value," he says. “It's a very solvent institution. If some extreme event would happen, it would have less need to raise outside equity to revamp its capital base."