Brazil firms lean on FX, debt dynamics as slump lingers
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Traders work at the floor of Brazil's BM&F Bovespa Stock Market in downtown Sao Paulo, Brazil, May 24, 2016. REUTERS/Paulo Whitaker
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By Brad Haynes and Bruno Federowski
SAO PAULO (Reuters) - Falling debt costs and a steadier Brazilian currency bolstered some companies' third-quarter earnings but the results disappointed hopes for signs of a recovery in the country's recession-bound economy.
Brazil's benchmark Bovespa stock index <.BVSP> has rallied nearly 40 percent in 2016, despite the worst recession since the 1930s, as investors welcomed a new center-right government's agenda of fiscal reforms and readied for an economic rebound.
While renewed investor confidence has brought down many Brazilian firms' financing costs, helping them turn a profit, the earnings season wrapping up this week showed little evidence that surging confidence has translated into more economic activity.
Revenue at three-quarters of the non-financial companies on the Bovespa index failed to keep pace with annual inflation, according to a Reuters analysis of securities filings.
About half the companies posted stronger net income, helped in most cases by easing financial expenses due to cheaper hedging, lower borrowing costs and cash from asset sales.
The election of Donald Trump as the next U.S. president has thrown into doubt the financial tailwinds that provided a silver lining in recent earnings.
If those expectations are confirmed, Brazilian companies may not be able to rely so much on cheaper debt and easier hedging.
"The turnaround until now has been really influenced by the currency and lower financing costs," said Andrew Campbell, head of equity strategy at Credit Suisse. "But to have a more sustainable trend or establish a full recovery requires contributions from more domestic sectors."
Cheaper borrowing helped electric utilities such as EDP Energias do Brasil
Commodity exporters from wood pulp producer Fibria Celulose SA
WEAK DOMESTIC DEMAND
With the economy still weak, third-quarter revenue at companies covered by analysts at Banco BTG Pactual SA, excluding Petrobras and Vale, was 0.4 lower than average analyst expectations.
Net income, thanks in part to lower financial costs, came in 6.7 percent above estimates, according to a report.
For sectors more sensitive to consumer demand, however, cheaper debt was not enough to offset the ongoing slump.
Retail giant GPA SA
Meat processors BRF SA
Telecommunications companies laid plans to carry a painful turnaround forward, with TIM Participações SA
Lower capital spending cut across sectors, with struggling firms from cosmetics maker Natura SA
To be sure, falling inflation is expected to spur a string of interest rate cuts by Brazil's central bank next year, which should spur consumer demand and encourage more corporate investment. Recent refinancing and paying down of debt also leaves room for an eventual resurgence of capital spending.
Yet the short-term outlook remains challenging, even for the industrial firms expected to benefit first from the investment-led recovery that economists are forecasting.
Electric motor maker WEG SA
"There are reasons for cautious optimism, but in practice there has still been no change," WEG executive Andre Luis Rodrigues told analysts on an earnings call.
(Reporting by Brad Haynes and Bruno Federowski; Editing by Christian Plumb and Nick Zieminski)
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