Ibovespa Enters Bear Market as Slump Threatens Rating

The Ibovespa entered a bear market as concern that an economic slowdown will spur a cut in Brazil’s credit rating drove down real-estate companies and retailers amid a selloff in emerging-market assets.

The gauge fell 1.1 percent to 44,965.66, bringing the loss from its Oct. 22 bull-market high to 20 percent. Russia’s Micex entered a bear market yesterday after falling 20 percent from January 2013. The Hang Seng China Enterprises Index approached a bear market today before paring losses.

While Brazil’s government tried to boost the economy through subsidized credit from state-run banks and tax cuts on products from appliances to cars, 2013 growth was below the regional average, and analysts forecast it will trail Russia, India and Mexico this year. A widening budget gap spurred Standard & Poor’s and Moody’s Investors Service to cut their outlooks for the rating last year. Stocks have sunk amid a broader emerging-markets slump on concern global growth is faltering.

“Investors felt a little relief after the government pledged to cut spending, but the downgrade is still a risk,” Rafael Goncalves Cardoso, an analyst at Gradual Investimentos, said by phone from Sao Paulo. “The drought in the first quarter is adding to the concern, as it could lead to power rationing that would reduce economic activity and lead to lower tax revenue.”

The Micex has led declines in major emerging-market stock gauges this year, dropping 18 percent as political turmoil in Ukraine sparked a standoff between the Kremlin and the West. The Hang Seng China Enterprises Index tumbled 14 percent as falling exports and slower manufacturing growth fuel concern that the biggest developing economy is weakening. India’s Sensex rose 3 percent. Indonesia’s benchmark entered a bull market today as Jakarta Governor Joko Widodo secured his party’s nomination as a presidential candidate.

Budget Cuts

Brazilian homebuilder Rossi Residencial SA has been the worst performer during the country’s bear market, sliding 54 percent. PDG Realty (PDGR3) SA sank 37 percent. Retailer Cia. Hering lost 22 percent.

Finance Minister Guido Mantega said last month that 44 billion reais ($18.7 billion) in cuts to this year’s budget will slow inflation and reduce debt, addressing concerns raised by Moody’s and S&P. Since the beginning of the year, Brazil has been enduring a drought that may be the worst in 80 years, Mauricio Tolmasquim, the head of the government’s energy-research agency, said in Brasilia on March 12.

Economic Outlook

Brazil’s economy will grow 1.68 percent in 2014 and 2 percent in 2015, according to economists surveyed by the central bank. Last year’s budget deficit was 157.6 billion reais, the biggest in records dating to 2002. The surplus before interest payments was 1.9 percent of gross domestic product, below the government target of 2.3 percent, which had been reduced from about 3.1 percent at the start of last year.

“There’s a continued weak environment,” Nick Robinson, the head of Brazilian equities at U.K.-based Aberdeen Asset Management Plc (ADN), which manages about $15 billion of Latin American shares, said by phone. “Growth is a concern for this year still.”

Brazilian stocks also have been hurt by signs that expansion is faltering in China, the Latin American country’s biggest trading partner, according to Marcel Kussaba, the head of equity research at Quantitas Asset Management.

“There has been a lot of uncertainty about China’s economy this year, which makes investors more cautious about commodity producers,” Kussaba said in a phone interview from Porto Alegre, Brazil. “Stock valuations need to be more attractive to convince investors to take more risk in such a cloudy scenario both internationally and domestically.”

Steelmakers Rally

Commodity producers account for 32 percent of the benchmark index’s weighting, data compiled by Bloomberg show.

Fifty-one of the Ibovespa (IBOV)’s member stocks fell today while 17 gained. MRV Engenharia e Participacoes SA was the worst performer, plunging 13 percent to 7.35 reais at the close of trading in Sao Paulo, the biggest decline since May 2012. The homebuilder reported fourth-quarter adjusted net income of 72.2 million reais, compared with an average estimate of 131 million reais among seven analysts surveyed by Bloomberg.

Steelmaker Cia. Siderurgica Nacional SA (CSNA3) rallied 12 percent to 9.61 reais after announcing a plan to buy back shares. Rival Usinas Siderurgicas de Minas Gerais SA rose 5.2 percent to 9.03 reais, the steepest gain since December, as JPMorgan Chase & Co. recommended buying the stock.

The Ibovespa has dropped 13 percent in 2013, the most among major equity benchmarks in the Americas, as policy makers boosted borrowing costs that have exceeded the government’s target for three years. Consumer prices as measured by the IPCA index increased 5.91 percent last year after rising 5.84 percent in 2012, according to the national statistics agency.

To contact the reporters on this story: Ney Hayashi in Sao Paulo at ncruz4@bloomberg.net; Denyse Godoy in Sao Paulo at dgodoy2@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Richard Richtmyer, Bradley Keoun

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