Brazil is losing to Mexico in the ranking of the world’s 500 most-valuable companies as economic growth falters in the South American country and President Dilma Rousseff’s interventionist policies erode investor confidence.
The number of Brazilian companies among the world’s biggest by market value fell to 10 from 15 two years ago, while Mexico’s rose to nine from five as the country benefited from an economic rebound in the neighboring U.S., according to data compiled by Bloomberg. The one-company differential is the smallest since 1998. Shares of oil company OGX Petroleo & Gas Participacoes SA and power utility Centrais Eletricas Brasileiras SA (ELET6) fell the most in Brazil during the period, pushing both off the list.
The Bovespa index has declined 33 percent in dollar terms in the past two years as Rousseff reneged on utility contracts, pressured banks to reduce profit margins, forced the country’s biggest oil company to charge below-market gasoline prices and weakened the real. The rout, which erased $323 billion in market value, was the worst in the Western Hemisphere after Argentina’s 41 percent plunge.
“The government’s maneuvers have been a big surprise to investors,” Christopher Palmer, who helps manage $2.5 billion of assets as a London-based director of global emerging markets for Henderson Global Investors Ltd., said in a phone interview. “They may be creating a better future for Brazilian people, but there’s a balance that has to be struck between the investors who provide the capital and the consumers.”
Foreign money managers sold a net $2.6 billion of Brazilian stocks in the past two months, the most since the 2008 collapse of Lehman Brothers Holdings Inc., according to BM&FBovespa SA data compiled by Bloomberg. The average price-to-earnings ratio of members of the benchmark index jumped to 19.2 this month from 9 in September 2011 as profits tumbled.
Rousseff has turned to more interventionist policies in a bid to spark a rebound in Latin America’s biggest economy. Gross domestic product will expand 1.5 percent this year, according to the median estimate from about 100 economists in a central bank survey released yesterday. That would be the second-slowest pace in nine years. Growth of 2.7 percent in 2011 lagged behind emerging-market peers India and China. Earnings among members of the Bovespa index have dropped 52 percent from their September 2011 peak.
A report from the national statistics agency today showed that Brazil’s gauge of broad retail sales, which includes construction materials and auto sales, rose 2 percent in September from a year earlier. The increase was the smallest in almost a year and trailed all forecasts in a Bloomberg survey of 20 economists.
Eletrobras, as Centrais Eletricas is known, fell to the world’s 1,334th biggest company from 330th in 2010. Its shares have plunged 49 percent this year, wiping out $7.6 billion of market value, as the government forces power utilities seeking concession renewals to cut rates by as much as 28 percent in an attempt to curb inflation and boost the competitiveness of Brazilian manufacturers.
OGX, the oil producer controlled by billionaire Eike Batista, has sunk 77 percent in the past two years, the most among the 15 Brazilian companies that were listed as the world’s biggest in 2010.
The Rio de Janeiro-based company, which reached a record- high of 23.27 reais in October 2010, is the worst performer on the Bovespa index this year after cutting its first project production targets by as much as 75 percent. OGX said on June 26 that it plans to stabilize production at 5,000 barrels a day at each of its two wells at the Tubarao Azul field, down from an initial target of 20,000 barrels daily.
State-controlled Petroleo Brasileiro SA (PETR4), Brazil’s largest company, slumped to the world’s 35th biggest from 10th in 2010. Shares have dropped 4.9 percent in Sao Paulo this year after tumbling 21 percent in 2011. The producer, which announced in 2008 the biggest oil discovery in the Western Hemisphere since 1976, has underperformed its main competitors since its $70 billion share offering in 2010 diluted minority shareholders’ ownership when the government used oil to pay for a stake.
Petrobras, as Petroleo Brasileiro is known, posted in the three months ending in June its first quarterly loss since 1999, and reported earnings that trailed estimates in the third quarter. While sales growth has been curbed as the government resists higher fuel prices in Brazil to avoid faster inflation, drilling costs have increased as the producer tries to abide by the so-called local-content rule, which obligates it to purchase 70 percent of its equipment from domestic suppliers.
“Since the share offering in 2010, investors completely lost confidence in the company’s ability to keep away from the government’s interventions,” Saulo Sabba, who helps manage 500 million reais ($243 million) as a director at Banco Maxima SA, said in a telephone interview from Rio de Janeiro. “Other sectors have suffered from these concerns as well. We don’t know how banks will do now that government-owned banks are pushing borrowing costs lower and lower.”
Shares of Itau Unibanco Holding SA (ITUB4), Latin America’s biggest bank by market value, have fallen 29 percent in the past two years. The lender is now the 101st most valuable company in the world, down from 53rd two years ago. Rousseff said in a nationally-televised speech on Sept. 6 that she “won’t rest until” lenders further reduce lending rates to consumers.
BRF Brasil Foods SA, Brazil’s largest maker of TV dinners and frozen pizzas, was also cut out of the list of the 500 most valuable companies, along with petrochemicals group Ultrapar Participacoes SA and steelmakers Cia. Siderurgica Nacional SA and Gerdau SA. Souza Cruz SA, the Brazilian maker of the Lucky Strike and Dunhill brands, and Telefonica Brasil SA, a unit of Spain’s largest phone company, were added to the group.
Coke bottler Coca-Cola Femsa SAB, silver producers Industrias Penoles SAB and Fresnillo Plc, and Grupo Financiero Santander Mexico SAB were the Mexican companies included in the list of the world’s most valuable.
Latin America’s second-biggest economy is outpacing growth in Brazil for the second year, boosted by a pickup in automotive exports as the recovery strengthens in the U.S., Mexico’s biggest trading partner. The Mexican IPC benchmark index has gained 10 percent this year and trades at 16.3 times analysts’ earnings estimates for the next four quarters, which compares with a ratio of 15.5 times for the Bovespa.
Coca-Cola Femsa has boosted revenue with three acquisitions in the past year, adding to a revenue surge driven by increasing Coke consumption in Mexico, which has the largest per capita intake of the soft drink. Penoles has benefited from a surge in silver prices, which have risen 16 percent in the past two years.
Rousseff’s measures to weaken the real to boost exports and shield Brazil from increasing competition from imported goods also contributed to the drop in companies’ market value. The real has slumped 9 percent this year, the worst performance after Argentina’s peso among 25 major emerging-market currencies, as policy makers carried out the biggest interest- rate cuts in the Group of 20 and bought dollars in the foreign- exchange market. Mexico’s peso gained 5.5 percent in the same period.
The spots lost to Mexico among the world’s 500 biggest companies aren’t a sign that Brazil’s importance in the global economy is shrinking because a drop in commodities accounted for some of the lower market values on companies including the steelmakers, said Oliver Leyland at Mirae Asset Global Investments.
“A lot of what happened with Brazil’s biggest companies has to do with a slump in commodities prices, not with the country’s fundamentals,” Leyland, who helps manage about 1 billion reais in stocks, said in a phone interview from Sao Paulo. “The Brazilian economy is doing relatively well. Brazil even surpassed the U.K. as the world’s sixth biggest economy.”
The outlook for growth in Brazil will depend on how clear the government is about its plans for some industries including energy and banks, given that the measures Rousseff has taken made investors more cautious about investing in the country, Henderson’s Palmer said.
“We don’t know enough about what the government thinks is an adequate return on capital,” he said. “If returns become too low because of legislation or regulation for any industry, if taxes go to high on mining sector or Petrobras is required to take too many non-core social-economic responsibilities, then capital will go elsewhere. That’s why share prices fall.”
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