Ibovespa, Real Rise as Brazil Keeps Investment Grade

  • Fitch downgrades Brazil's sovereign rating to the cusp of junk
  • Kroton, Petrobras among best performers on Ibovespa benchmark

Brazil’s real and stocks advanced, joining a rally in emerging-market assets, after Fitch Ratings cut Latin America’s largest economy by one notch but kept the nation’s investment-grade status.

The real and the Ibovespa swung between gains and losses after Fitch reduced Brazil to BBB-, one step above junk, with a negative outlook. The firm cited the government’s rising debt burden, difficulty in shoring up its budget and a slumping economy. Standard & Poor’s cut the country to junk on Sept. 9, while Moody’s Investors Service moved it to the lowest investment grade in August.

"The good news is that the downgrade still leaves Brazil in investment-grade territory,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “The bad news is that it looks like Fitch will eventually follow S&P in ‘junking’ Brazil."

Traders have turned bearish on Brazil as the nation is forecast to face its longest recession since the 1930s amid a widening corruption scandal at the state-controlled oil producer. While President Dilma Rousseff has reshuffled her cabinet earlier this month to try to gain lawmaker support for measures to revive the country’s finances, her low-popularity has spurred calls for an impeachment.

“Given the worsening in both the political and economic scenarios, it wouldn’t have been impossible for Fitch to cut Brazil two grades at once to junk,” said Ignacio Crespo, an economist at brokerage Guide Investimentos.

Brazil’s stocks and currency benefited Thursday from higher demand for riskier assets given the interest-rate outlook in the U.S., Crespo said. The MSCI Emerging Markets Index jumped 2.2 percent to a two-month high after odds that the Federal Reserve will increase borrowing costs by the end of this year fell to a record following disappointing economic data.

The real advanced 0.4 percent to 3.7994 per dollar, after dropping earlier as much as 1.6 percent. The Ibovespa rose 1 percent to 47,161.15, following a drop of as much as 0.8 percent. The equity gauge is trading at 10.96 times estimated earnings, trailing the average valuation of the past three years, according to data compiled by Bloomberg.

Brazilian issuers head the list of S&P’s potential credit downgrades as lower commodity prices push the total number of candidates among emerging markets to the highest in six years, the firm said in a report. Twenty-eight issuers in the nation may get their credit ratings cut, which compares to a total of 134 in developing countries, the most since August 2009, S&P said.

For-profit college manager Kroton Educacional SA rose most on the Ibovespa as the number of undergraduate students increased 5 percent in the third quarter even after the government’s loan program was cut. Petroleo Brasileiro SA, the world’s biggest junk-rated borrower, followed crude higher even after canceling a plan to sell 3 billion reais ($790 million) of local bonds.

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