Brazil’s Scandal-Tainted Stocks Are Leading World’s Best Rally

  • Companies involved in corruption probes beat those that aren’t
  • New government said to be main driver for the stocks’ gains

In Brazil, home to the biggest stock bull market in the world, it is ironically companies that have been tainted by corruption scandals that are leading the rally.

While the benchmark Ibovespa is up 25 percent this year, a weighted Bloomberg index of 10 companies entangled in the nation’s many graft investigations -- call it Brazil’s bad-boys index -- has gained 41 percent. Furthermore, it’s outperforming a second group whose management practices have met the local stock-market operator’s top governance and sustainability standards. Members of the Bloomberg gauge, which includes state oil giant Petroleo Brasileiro SA and the utility known as Eletrobras, have delivered three times the return of their untainted peers.

What’s driving the rally for many of the stocks is the exact same thing that was seen as a negative factor in years past: Brazil’s government. Suspended President Dilma Rousseff’s administration was criticized by investors for strong-arming Eletrobras into cutting electricity prices and using Petrobras as a policy tool. As a new administration takes over while she faces an impeachment trial, investors have sent the benchmark Ibovespa index to the world’s biggest gains this year for major equity gauges, betting that corporate governance will improve and the worst of the revelations have now come to light.

“Those shares were hit very hard last year, opening room for speculative traders to take advantage of their liquidity,” said Adeodato Volpi Netto, the head of capital markets at Eleven Financial Research in Sao Paulo. Still, governance is a top focus for investors, and the stocks could turn into big losers again if it looks like things aren’t improving, he said.

It’s been more than two years since Petrobras, as the oil company is known, was pulled into the sweeping corruption scandal known as Carwash, and the stock is still down 22 percent in that time, even after a 59 percent rally this year. Another member, investment bank Grupo BTG Pactual, whose founder Andre Esteves was jailed last November for allegedly obstructing the Petrobras probe, has also rebounded this year but is still down about 45 percent since the arrest.

But for every stock in the index that took a hit is a company whose involvement in probes barely seems to have registered with investors. Banco Bradesco SA, Brazil’s second-biggest bank by market value, is up 11 percent since its chief executive and two other executives were accused of wrongdoing in May by federal police in an investigation into tax fraud. Steelmaker Gerdau SA has surged 76 percent since it was pulled into the same probe in February. And Eletrobras, whose former head of nuclear power was accused in July 2015 of taking kickbacks from builders, has almost tripled since then.

Eletrobras and Petrobras have said they are cooperating with investigators, and the other companies in the Bloomberg gauge have denied wrongdoing. Gerdau said its share gain this year "reflects the track record and the seriousness that the company has demonstrated."

Banco Santander Brasil SA said it isn’t being investigated after newspapers O Globo, Folha de S.Paulo and Jornal do Comercio reported in May that the lender was mentioned by prosecutors as paying bribes to avoid taxes. The bank said the performance of its stock in 2016 is a consequence of its operational and financial results, in addition to investors’ confidence in the lender’s management.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE