Cheapest Brazil Stocks in Two Years Sends Thornburg Hunting
Brazilian stocks are at their cheapest relative values since 2009, prompting Van Eck Associates and Thornburg Investment Management to buy builders and retailers on bets a year of higher interest rates is ending.
The 69-share Bovespa index, heading for its worst first- quarter performance since 2008, trades at 10.7 times analysts’ current-year earnings estimates compared with 11.5 times for MSCI Inc.’s Emerging Markets Index, weekly data compiled by Bloomberg show. The discount reached 10 percent last month, the widest level since March 2009, after Brazil’s measure traded at a premium of as much as 7.6 percent in July.
The Bovespa dropped 2.7 percent in the first three months, nearly three times as much as the developing-nation gauge, as policy makers extended their most aggressive increase in borrowing costs since 2005 to slow inflation. Confidence is building that President Dilma Rousseff’s spending cuts will hold consumer price gains down even as Latin America’s largest economy expands at a 4 percent rate.
“Brazil is a good place to go hunting,” said Lewis Kaufman, who helps manage $79 billion at Thornburg in Santa Fe, New Mexico, and whose Thornburg Developing World Fund beat 96 percent of peers last year.
The Bovespa’s decline left Sao Paulo-based Itau Unibanco Holding SA (ITUB4), Latin America’s biggest bank by market value, at the lowest ratio of price to estimated earnings in seven months while Porto Alegre-based Lojas Renner SA, Brazil’s biggest publicly traded clothing retailer, fell to the lowest valuation since May. Cyrela Brazil Realty SA Empreendimentos e Participacoes (CYRE3), the nation’s second-largest homebuilder, based in Sao Paulo, dropped to the lowest since July 2009.
Investors have pulled 2.4 billion reais from Latin America’s biggest equity market this year, the most for the period since 2008, according to the BM&FBovespa SA (BVMF3) exchange.
Recommendations to buy Brazilian stocks fell to 37.5 percent of all ratings last month, the lowest level since at least 1997, data compiled by Bloomberg show. Borrowed stock accounted for 2 percent of Brazil’s total market value in February, after reaching an all-time high of 2.4 percent in January, according to figures from the Sao Paulo exchange.
Brazilian stocks aren’t overvalued, said Fabio Dall’Acqua, managing partner at Constellation Asset Management in Sao Paulo.
“The market still offers good opportunities,” Dall’Acqua said today at the Bloomberg Brazil Economic Summit in Sao Paulo. “Financials are a very strong story in Brazil,” he said.
“People are very bearish,” said Kuczma, who is buying builders as he adds to the “underweight” position for Brazil in his Van Eck Emerging Markets Fund. The fund beat 95 percent of peers last year, data compiled by Bloomberg show.
“In terms of the interest rate cycle, we’re getting close to the peak,” said Kuczma. “People can become more comfortable investing in Brazil.”
Brazil’s central bank began raising the benchmark interest rate from a record low 8.75 percent in April last year. The 300 basis points, or 3 percentage points, since then marks the biggest jump since 2005, when policy makers completed a series that added 375 basis points to the overnight lending rate.
Government Spending Cuts
Central bank President Alexandre Tombini will increase borrowing costs once more this year to 12.25 percent at the April 19-20 meeting, according to the median forecast in a central bank survey of about 100 economists published March 28. Annual inflation, at 6.01 percent in February, is running at the fastest pace since November 2008.
The People’s Bank of China boosted its benchmark one-year lending and deposit rates in February for the third time in four months, while Russia that month unexpectedly boosted its key financing rate from a record low. In India, policy makers have raised benchmark rates eight times since last year.
The Shanghai Composite Index is up 5.3 percent this year while Russia’s Micex has advanced 5.9 percent. India’s Sensex has tumbled 6.8 percent.
Rousseff, who took office this year, slashed 50.1 billion reais from the 2011 budget by reducing spending on defense, education, housing, subsidies and payroll spending. While she spared social programs and the government’s so-called growth acceleration plan, the budget initiative indicates inflation may moderate, according to Jerome Booth, who helps manage about $47 billion in emerging-markets assets as co-founder and head of research at Ashmore Investment Management in London.
“She’s doing the right things,” Booth said. “Going forward you’d expect the Brazilian stock market to outperform in real terms.”
Higher rates are taking a toll on growth. The economy will expand 4 percent this year, from a two-decade high of 7.5 percent in 2010, according to the median forecast in the central bank survey.
As the expansion eases, it’s too early to say Brazilian stocks are cheap because of the prospect the government will adopt additional measures to stem currency gains that undermine export growth, said Samir Patel, who helps oversee $3.2 billion in emerging markets at Hermes Fund Managers Ltd. in London.
The real has gained 39 percent against the dollar since the end of 2008, the most among 25 emerging-market currencies tracked by Bloomberg, even after Finance Minister Guido Mantega tripled to 6 percent in October a tax on foreigners’ fixed- income investments, while leaving the levy on equity purchases at 2 percent since 2009. Tombini signaled last week he may enact further so-called macro-prudential measures to contain prices after his predecessor raised reserve and capital requirements for local banks in December.
Brazilian dollar bonds have returned 0.9 percent this year, compared with an 0.8 percent gain for emerging-market debt, according to JPMorgan Chase & Co.’s EMBI+ indexes.
“There are definitely too many question marks,” said Patel, who is maintaining an “underweight” position in Brazil relative to MSCI’s developing-nation gauge. “Day by day you see different changes being made.”
The fastest inflation in more than two years, together with global growth concerns, also are keeping investors away from Brazilian stocks, said Carlos Andre, who oversees 373 billion reais as chief investment officer of Banco do Brasil SA’s asset management unit in Rio de Janeiro. Homebuilders and banks may continue to suffer on prospects that the central bank will take further steps to stem credit growth, he said.
“This year seems to be a repeat of 2010, in that fixed income is showing itself to be a more attractive alternative,” Andre said in a telephone interview.
Young Kim, who oversees $1.1 billion in Brazilian stocks as chief investment officer at Mirae Asset Global Investments Brasil in Sao Paulo, said Brazilian banks and homebuilders are too cheap to pass up after they led declines on the Bovespa this year. Itau traded at 10 times estimated earnings last month, the lowest level since July. Cyrela’s ratio fell to a 20-month low of 8.7 earlier this month.
Mark Mobius, who manages $34 billion as executive chairman of Templeton Asset Management Ltd.’s Emerging Markets Group, said last week that he’s betting on oil staying above $100 a barrel by adding to holdings of state-controlled oil producer Petroleo Brasileiro SA (PETR4), the biggest drag on the Bovespa last year with a 23 percent slide. Petrobras raised $70 billion in a stock sale that Mobius called an “abomination” in September.
Brazilian stocks can advance another 10 percent over current levels, Alan Gandelman, chief executive officer at broker ICAP Plc, said at the Bloomberg Economic Summit.
The Bovespa may rise to 75,000 this year, he said, adding he’s “very optimistic” about the market in Brazil.
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