Manchester City’s Tevez Wooed by Real BofA Calls Overvalued: Brazil Credit

The Brazilian import boom that’s prompting Bank of America Corp. and RBC Capital Markets to call the real overvalued may extend to the soccer field.

SC Corinthians Paulista is making a $56 million bid to take Argentine striker Carlos Tevez from Manchester City in the English Premier League. The real’s two-year, 24 percent rally is helping the team make the biggest offer ever by a Brazilian club and is ushering in “a new era for Brazilian sports business,” said Luis Paulo Rosemberg, vice president of marketing at Corinthians in Sao Paulo.

The real is trading 52 percent above its fair value, the most among emerging-market currencies, according to data compiled by Bloomberg from The Economist’s Big Mac index. The currency’s rally helped spark an 11.4 percent gain in real- denominated bonds in dollar terms this year, more than double the average return on local-currency emerging-market notes, according to JPMorgan Chase & Co.

“The Brazilian currency will probably prove to be quite uncompetitive at current levels,” Nick Chamie, the global head of emerging markets at RBC in Toronto, said in a telephone interview. “On a longer term perspective, we don’t think the real would likely remain at such strong levels as it is now.”

The real’s valuation is prompting analysts to predict the currency will tumble 10 percent by 2013, which would make it the worst performer in the world, according to the median estimate in a Bloomberg survey of economists.

Record Imports

Brazilian policy makers raised the cost of betting on the real against the dollar last week after it reached a 12-year high of 1.5524, the latest government move aimed at stemming an advance that is swelling the current account deficit. Finance Minister Guido Mantega tripled to 6 percent a tax on foreign investors’ fixed-income purchases in October.

The real has soared 68 percent since the end of 2004, the most among major currencies, as demand for Brazil’s commodity exports surged while the world’s second-highest inflation- adjusted interest rates attracted foreign investment.

The rally helped drive imports to a record $206 billion in the past 12 months, a two-fold increase from $102 billion four years earlier. Brazil’s deficit in the current account, the broadest measure of trade and services, climbed to an all-time high of $51 billion in the 12 months through May. The shortfall will increase to $70 billion next year, according to a central bank survey on July 8.

‘Long-Term Advantage’

Corinthians’ offer to Manchester City topped the $20 million it paid Argentina’s Boca Juniors for Tevez in 2004. Tevez, a 27-year-old Buenos Aires native, left Corinthians, Brazil’s biggest soccer club by revenue, in 2006 for London. Manchester City spokeswoman Vicky Kloss declined to comment when contacted by Bloomberg News on July 11.

“Of course our strong real is helpful,” Corinthians’ Rosemberg said in a telephone interview. “Our currency makes us stronger too. It’s also a long-term advantage.”

The real will weaken 4.3 percent to 1.65 per dollar by the end of 2012 from 1.5791, making it the worst performing emerging-market currency after the Argentine peso and the South African rand, according to the median estimate of 15 analysts surveyed by Bloomberg. The currency will decline further to 1.75 per dollar by 2013, the survey shows. Bank of America predicts a decline to 1.8 next year while Goldman Sachs Group Inc. forecasts a drop to 1.85 by 2012.

Bearish

Options markets are also turning more bearish on the real. It costs 5.5 percentage points more for a one-year option contract granting the right to sell the real than to buy the currency, compared with 5 percentage points three months earlier, according to so-called risk-reversal rates.

The “real is significantly overvalued,” Jim O’Neill, chairman of Goldman Sachs Asset Management, wrote in an e-mail response to questions sent by Bloomberg. “I get visited by Brazilians who now describe London as cheap. Astonishing.”

Albert Fishlow, a professor emeritus at the School of International and Public Affairs at Columbia University, said at a Bloomberg Brazil Conference yesterday in New York that the real may not slump as much as analysts estimate. He said the 55 percent gain in commodity prices in the past two years and the country’s projected oil production increases are supporting the currency.

“Everybody says that the real is overvalued,” Fishlow said. “It may not be so overvalued. There is the question of whether that exchange rate is going to change that much.”

‘Attractive Place’

Roberto Simoes, head of proprietary trading at BES Investimento do Brasil in Sao Paulo, said the real may rise as high as 1.5 per dollar as widening interest-rate differentials help lure investment.

“It’s difficult to contain the real’s appreciation,” Simoes said in a telephone interview. “If you look at the world environment, Brazil is an attractive place to stay.”

Brazil’s benchmark 10-year bonds yield 12.5 percent, or 954 basis points more than similar-maturity U.S. Treasuries and 426 more than Russia debt.

The yield on interest-rate futures contract due in January 2012 fell one basis point yesterday to 12.47 percent, suggesting traders are betting the central bank will boost the rate 50 basis points to 12.75 percent by yearend to slow the fastest inflation since 2005. The benchmark U.S. rate is between zero and 0.25 percent.

The extra yield investors demand to hold Brazilian dollar bonds instead of U.S. Treasuries narrowed four basis points to 172, according to JPMorgan.

Growth Outlook

The cost of protecting Brazilian bonds against default for five years rose one basis point to 117 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Annual inflation quickened to a six-year high of 6.71 percent in Latin America’s biggest economy in June. The economy will grow 4 percent this year after expanding 7.5 percent in 2010, the fastest in two decades, according to a Bloomberg survey.

The real is 39 percent stronger than its average of the past decade against the dollar and has almost doubled its value against its main trading partners after adjusting for inflation, according to data compiled by JPMorgan Chase & Co.

“The odds for a weaker currency in Brazil are increasing,” David Beker, a Sao Paulo-based strategist at Bank of America, said in a telephone interview. “The real is indeed overvalued.”

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bryan Gibel in New York at bgibel@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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