Oct. 21 (Bloomberg) -- Brazilian stocks climbed, paring losses from the biggest drop in four months, on prospects of improving demand for metals and speculation a plunge from a tax on foreign equity purchases was overdone.

MMX Mineracao e Metalicos SA jumped 5.2 percent after Barclays Plc said iron-ore markets are “tightening” and prices may rise 20 percent next year. Steelmaker Cia. Siderurgica Nacional SA added more than 3 percent after being raised to “buy” at Goldman Sachs Group Inc. BM&FBovespa SA, Latin America’s biggest exchange, rose for the first time in four days after Goldman Sachs said a drop spurred by the investment tax yesterday was an “overreaction.”

“Yesterday was a bucket of cold water on a rally that had lasted a long time, but it doesn’t change the fact that the upward trend will continue,” said Guilherme Sand, who helps manage the equivalent of $400 million at Solidus Brokerage in Porto Alegre, Brazil. “Brazil will continue to receive a lot of investment. You’re not going to see fewer flows just because of a 2 percent tax.”

The Bovespa index rose 0.3 percent to 65,485.59, trimming a gain of as much as 2.8 percent in the final hour of trading. The gauge tumbled 2.9 percent yesterday after the government imposed a 2 percent tax on foreign purchases of fixed-income securities and stocks to stem a rally in the nation’s currency.

The BM&FBovespa SmallCap Index added 0.8 percent today after a 3.4 percent slide yesterday. The real reversed four days of losses and climbed 1.2 percent to 1.7345 against the dollar. Among other markets, Mexico’s Bolsa dropped 0.4 percent and Chile’s Ipsa slipped 0.6 percent. The MSCI Emerging Markets Index retreated 0.4 percent.

Brazil Growth

Global led by emerging markets will boost demand for commodities while Brazil’s expansion lifts profits for domestic companies, Sand said in a phone interview. While the tax on foreign purchase of equity may initially hurt smaller companies that don’t trade depositary receipts, investors will continue to invest in Brazil because some industries aren’t represented in foreign exchanges, Sand said.

MMX, the iron-ore miner controlled by Brazilian billionaire Eike Batista, added 65 centavos to 13.10 reais, leading gains on the Bovespa index.

Iron-ore prices will “significantly exceed consensus expectations for at least the next five years,” Barclays analysts led by Christopher LaFemina wrote.

Vale SA, the world’s biggest iron-ore producer, rose 0.7 percent to 40.77 reais. Barclays said in a note to clients Vale may benefit most from the price increases.

CSN, BM&FBovespa

Cia. Siderurgica Nacional SA, Brazil’s third-biggest steelmaker, rose 3.6 percent to 63.50 reais. Brazil’s second- biggest maker of flat steel for the automotive industry was raised to “buy” from “neutral” at Goldman Sachs, which said the company may benefit from a “tighter global supply-demand outlook” for iron ore and coking coal than for steel.

BM&FBovespa rose 0.8 percent to 12.51 reais after plunging 8.4 percent yesterday. The “structural growth” of Brazilian capital markets will offset the impact of the tax and trading in derivatives won’t be “dramatically” affected, Goldman Sachs analysts wrote in a note today. They recommended buying the shares.

Banco Santander SA said the Bovespa index may climb to 80,000 by the end of next year, led by “domestic cyclicals” as consumer confidence pushes up spending in Brazil.

“We view this as the just the beginning of a long-term secular shift of the main investment theme in Brazilian equities toward domestic cyclicals,” strategist Marcelo Audi wrote.

Oil Rise

Petroleo Brasileiro SA, Brazil’s state-controlled oil producer, increased 0.6 percent to 36.70 reais. Oil surged to a one-year high as the dollar dropped and a U.S. Energy Department report showed a greater-than-forecast decline in supplies of gasoline.

Net Servicos de Comunicacao SA, Brazil’s biggest cable-TV company, gained 2.7 percent to 22.50 reais. The Sao Paulo-based company posted net income of 246 million reais ($141 million) in the third quarter, topping analyst estimates.

The Bolsa fell for the first time in three days after Mexico’s lower house of congress approved a bill to apply a 3 percent tax on telecommunications services, forcing carriers to decide whether to absorb the cost or pass it on the consumers.

Carso Global Telecom SAB, the telecommunications holding company controlled by Carlos Slim, slipped 2.3 percent to 58.90 pesos. Telmex Internacional SAB lost 1.5 percent to 9.22 pesos, while Telefonos de Mexico SAB fell 1.1 percent to 11.34 pesos.

The legislation would boost taxes on income and sales, presenting a “worst-case scenario” for Slim’s wireless carrier America Movil SAB, said Andres Coello, an analyst at BBVA Bancomer SA in Mexico City. America Movil lost 0.3 percent to 31.04 pesos.

Banco Compartamos SAB rose 5.5 percent to 53.15 pesos for the biggest gain in the Bolsa. The bank that lends to low-income customers was reiterated a “buy” at UBS AG. Third-quarter earnings yesterday were “very good,” said Gerardo Roman, head of trading at Actinver SA.

To contact the reporter on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net; Emily Schmall in Mexico City at eschmall@bloomberg.net

Last Updated: October 21, 2009 17:34 EDT