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OGX Ouster Bolsters Ibovespa Benchmark Status: Corporate Brazil

OGX Petroleo & Gas Participacoes SA’s removal from the Ibovespa stock gauge is damping volatility and bolstering the index’s status as Brazil’s equity benchmark.

The Ibovespa’s 30-day historical volatility, which peaked in July at 30.4, dropped to a five-month low of 17.1 on Nov. 11 after the gauge’s operators expelled Eike Batista’s oil producer following its Oct. 30 bankruptcy filing, according to data compiled by Bloomberg. The exclusion capped a 16-month, 98 percent drop that pushed the shares to as low as 13 centavos (6 cents) and erased 19.7 billion reais in market value.

While the plunge made OGX the Ibovespa’s smallest member by market capitalization, it affected the gauge’s direction disproportionately because of the index’s reliance on trading volume to determine the relative importance of individual stocks. As OGX posted the most extreme price swings among Latin America’s 321 biggest companies, index operator BM&FBovespa SA announced planned changes to how it determines stock weightings that put more emphasis on the value of publicly traded shares, similar to the method used by MSCI Inc.’s Brazil equity gauge.

“OGX became quite a big component of the benchmark, and this year it has hurt the credibility of the Ibovespa,” said Nicholas Cowley, who helps oversee about $100 billion as an investment manager at Henderson Global Investors Ltd. in London. “They recognized that this methodology is not necessarily the right one. I think that will restore people’s faith.”

The new rules also would bar stocks that trade for less than 1 real. OGX was the only Ibovespa member below that level when the exchange operator disclosed the changes in September.


OGX had the biggest impact on the Ibovespa’s direction in 16 of October’s 23 trading sessions. The 97 percent drop in the shares in 2013 before they were removed accounted for about four-fifths of the index’s 10 percent decline during the period.

The Rio de Janeiro-based company’s press office declined to comment on the price or volatility of its shares. OGX is looking for ways to overcome its “momentary difficulties,” Sergio Bermudes, a lawyer for Batista, said by phone on Oct. 30.

The Ibovespa’s OGX-fueled volatility discouraged investors from benchmarking their portfolios against the index because it didn’t accurately reflect the performance of Brazilian stocks, according to Mario Pierry, an analyst at Deutsche Bank AG. Instead, investors were looking to the MSCI Brazil 25-50 index and other gauges of the country’s equity market, he said.

“A lot of people were avoiding the Ibovespa because of OGX,” Pierry said by phone from Sao Paulo. “The stock leaving the index will have a positive impact on trading volumes.”

Disappearing Fortune

“The image of the exchange wasn’t damaged by OGX,” BM&FBovespa’s Chief Executive Officer Edemir Pinto told reporters on Nov. 11.

BM&FBovespa declined to comment further.

Batista, who began listing six commodity-related startups in 2006, amassed a $34.5 billion fortune by March 2012. The 57-year-old tycoon lost his title as Brazil’s richest person in November 2012 and dropped off the list of the world’s billionaires in July as he sold assets and shrank operations.

The Ibovespa rose 0.8 percent to 52,230.29 at the close of trading in Sao Paulo. The gauge has declined 14 percent this year, the fourth-worst performance among the 94 biggest benchmark indexes globally.

Government Deficit

While OGX squelched Ibovespa returns this year, the stock can’t be entirely blamed for the overall poor performance of Brazilian equities, according to Rogerio Freitas, a partner at hedge fund Teorica Investimentos in Rio de Janeiro who also cited government fiscal policies as a drag on shares.

Brazil’s budget deficit swelled in September to 3.3 percent of gross domestic product, the largest since 2009. Standard & Poor’s began a 24-month review of Brazil’s BBB credit grade on June 6.

OGX’s exit from the Ibovespa will help Brazil’s stock market even if faltering growth and concern that the Federal Reserve will reduce stimulus damp returns, according to Marc Sauerman, a portfolio manager at J. Malucelli Investimentos.

“With OGX leaving, you no longer have a 4 percent, 5 percent share of the index that’s purely speculative,” Sauerman said in a telephone interview from Curitiba, Brazil. “You’re showing that Brazil isn’t just for speculation.”

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