The sell-off in billionaire Eike Batista’s companies is wreaking havoc with Brazil’s benchmark stock gauge.
While this year’s 81 percent tumble in Batista’s oil producer, OGX Petroleo & Gas Participacoes SA, has made OGX one of the 10 smallest companies on the 71-member Ibovespa, the stock’s daily plunges and rebounds have made it the most important in the index. OGX had the biggest impact on the gauge’s direction in 23 of the past 40 trading sessions, a growing trend caused partly by the exchange’s reliance on trading volume for determining index weighting in addition to market value.
OGX, along with Batista’s other two companies included in the Ibovespa, is whipsawing the index’s readings as the stock posts the most extreme price swings among 823 emerging-market shares tracked by MSCI Inc. The Ibovespa’s three-month volatility has soared 31 percent since mid-April to 21.5, making it the most erratic major benchmark in the Americas.
“It’s making the index look increasingly irrelevant to monitor how markets are doing,” Nicholas Cowley, who helps oversee about $100 billion as an investment manager at Henderson Global Investors Ltd., said by phone from London. He said he’s begun relying on other indexes, including MSCI’s Brazil gauge and the Brazil IBrX Index, to track Latin America’s biggest stock market. “You’re getting massive swings in the Ibovespa.”
OGX, which trades for 81 centavos ($0.36), had a four-day stretch last week where it alternated between 15 percent declines and 12 percent advances as traders speculated on the future of a company whose market value has plunged to just over $1 billion from a 2010 peak of $42 billion.
Volatility in each of the three Batista companies in the benchmark has jumped to the highest since at least 2009, more than four times higher than Ibovespa’s level. The index entered a bear market on June 11, driven lower by OGX’s collapse as well as slumping economic growth and quickening inflation. The Ibovespa’s 22 percent decline this year is the biggest among major equity indexes in the world.
Batista, whose $34.5 billion fortune in early 2012 made him the world’s eighth-richest person, dropped from the ranks of the 200 wealthiest people this month as all six of his publicly traded companies fell at least 23 percent in the past year.
OGX has tumbled as it failed to meet output targets. The company cut production targets for its first oil project off the coast of Brazil by as much as 75 percent last June. OGX said on June 26, 2012 that it aimed to stabilize production at each of its first two wells at 5,000 barrels a day at the Tubarao Azul field in the Campos Basin, after originally planning to pump as much as 20,000 barrels a day at each well.
While Rio de Janeiro-based OGX said on June 13 that it isn’t considering a debt restructuring, investors are losing confidence that Batista can honor his obligations. OGX’s bonds due 2018 dropped to a record low of 27.6 cents on the dollar this week as the company is poised to run out of money by mid-2014, according to data compiled by Bloomberg.
OGX declined to comment on its share performance in an e-mailed response to questions. EBX Group Co., the holding company that oversees Batista’s energy, mining, logistics and shipping companies, also declined to comment.
“I am as disappointed as you are and working to change this reality with new discipline,” Batista posted on April 13 on Twitter in response to a user questioning what he had to say to shareholders who have lost money betting on his ventures.
Trading has soared in OGX as investors look to profit from the price swings. OGX’s average daily volume has jumped to 165.9 million shares over the past three months from 28 million a year ago. That’s more than seven times the 22.5 million-share daily trading average in Vale SA, the world’s largest iron-ore producer and the Ibovespa’s heaviest-weighted stock.
Before trading and volatility in OGX began to surge last year, the stock’s effect on the index was muted. OGX had the fourth-biggest impact on the Ibovespa in 2011 and 14th biggest in 2010.
BM&FBovespa SA, the stock exchange operator, declined to comment in an e-mailed response to questions on OGX’s impact on the index. The company says on its website that it hasn’t made changes to the index’s methodology since its inception in 1968.
Given the limited number of actively traded Brazilian stocks, periodic surges in the index’s volatility caused by developments like OGX’s plunge are inevitable, said Otavio Vieira, a partner at hedge fund Fides Asset Management.
“The fact that a single stock can have a big influence on the index goes to show how the market still needs to develop further so other companies are included in it,” Vieira said in a phone interview from Rio de Janeiro.
The pickup in Ibovespa’s price swings is part of a broader jump in global equity volatility triggered by speculation that the Federal Reserve will begin withdrawing monetary stimulus from the U.S. economy. Three-month volatility in the MSCI World Index has climbed 8.4 percent this year to 12.
Ibovespa’s volatility is 36 percent higher than it was two years ago while the MSCI World’s dropped 12 percent over that time. Volatility in MSCI’s gauge of emerging-market shares fell 2 percent in the span.
A rebalancing of the Ibovespa scheduled for August will do little to mute the swings because the focus on trading volume will preserve OGX’s importance in the index, according to data compiled by Bloomberg. BM&FBovespa last rebalanced the index on May 6, when OGX was given a 5.1 percent weighting, the third heaviest after state-owned oil company Petroleo Brasileiro SA and Vale.
“You do get these slightly nonsensical situations, where companies like OGX fall, volume goes up and they suddenly become a larger part of the benchmark,” Nick Robinson, the head of Brazilian equities at Aberdeen Asset Management, which manages about $15 billion of Latin American equities, said in an interview in New York. “The Ibovespa was put together when Brazil was a much less developed market, and these days, a liquidity weighted index is perhaps not the most sensible benchmark to be using.”