What happened
Shares of Brazilian fintech company StoneCo (STNE 0.32%) rose this week, appreciating 18.8% through Thursday trading, according to data provided by S&P Global Market Intelligence.
There wasn't much company-specific news this week, although one Wall Street analyst did modestly raise their price target on shares. In addition, StoneCo is tightly connected with Brazil's overall economy, and stimulative spending intentions reported from Brazil's new liberal government this week could be helping lift shares.
So what
Brazil's economy is heavily weighted toward commodities such as oil and iron ore, among others. Recently, some resilient growth numbers in the U.S. along with optimism over China's rapid reopening are bolstering the prices of several commodities that had fallen in the latter part of 2022. In general, better commodity prices mean good things for Brazil's economy.
In addition, new Brazilian President Luiz Inacio Lula da Silva, who took over on Jan. 1, is proposing more fiscal spending to boost Brazil's growth. While increased spending threatens to keep Brazil's inflation at its current high numbers, da Silva even suggested this week the Central Bank of Brazil raise its inflation target from below 4% to 4.5%.
In this period of high inflation, policymakers have to execute a delicate dance of keeping up economic growth without letting inflation spike to unwieldy levels. Still, should Brazil be able to grow faster than thought but with higher interest rates, that could potentially benefit financial companies in the country, such as StoneCo.
The rapid inflation over the past 18 months has not been a positive, as there is a lag between the time that the Brazilian central bank can raise rates and when StoneCo can adjust the interest rate it charges its customers to a higher level. So, StoneCo has seen its net interest margins squeezed hard. That, combined with fear over recession has led to StoneCo's tremendous 89% drop over the past two years.
STNE Percent Off All-Time High data by YCharts
However, if StoneCo can eventually catch up with its rate hikes, its net interest margin would expand again. And if the Brazilian economy is on a better growth trajectory, that tends to be good for financial and fintech outfits.
Also helping matters this week was a price-target raise for StoneCo from UBS analyst Mariana Taddeo. While keeping a neutral rating on shares, Taddeo actually raised StoneCo's price target from $9 to $9.80. It wasn't apparent why Taddeo made the move, but the potential for increased growth in Brazil combined with StoneCo's improved quarter-over-quarter profit trajectory shown in the third-quarter report could have been enough to boost sentiment.
Now what
It should be known that international stocks have generally had a good week. The U.S. dollar, having strengthened a lot last year, has weakened significantly over the past few months. A weaker U.S. dollar increases the value of earnings generated in foreign currencies.
When combined with seemingly resilient economic growth in the U.S., China, and Brazil in spite of higher central bank rate hikes, economically sensitive stocks like StoneCo benefited handsomely in a good week for growth tech stocks broadly.
