Brazil Is First BRIC to Enter Bear Market as Inflation Drives Down Stocks
Brazilian stocks became the first among the largest emerging economies to fall into a bear market this year as the government adopted new measures to stem currency gains and inflation quickened.
The Bovespa index dropped 1.8 percent to 58,288.46 yesterday, pushing it down 20 percent from a November high. No other benchmark equity gauge in the so-called BRIC nations has declined this year at least 20 percent from the preceding bull- market peak, the standard definition of a bear market.
Brazil stocks have tumbled as inflation reached the fastest pace since 2005 even after the central bank lifted interest rates eight times in 15 months. Lenders dropped as policy makers raised reserve requirements and taxes on consumer loans to slow credit growth.
“It’s somewhat baffling that it’s doing so badly,” said Arthur Byrnes, who helps manage $800 million as chairman of Deltec Asset Management in New York. “People think Brazil is handling the fight against currency appreciation rather clumsily. I think it’s a buying opportunity. You’re getting near a point where inflation is going to peak.”
The real tumbled 1.1 percent to 1.5556 per dollar yesterday after the government said it will levy a tax on some investments in currency derivatives.
“Brazil has been quite anxious to find ways to control growth and inflation without putting undue pressure on the currency,” John Lomax, an emerging-markets strategist at HSBC Holdings Plc, said in a phone interview from London. “This is another example of them trying to find ways to stop the currency from going up without raising rates.”
The Bovespa is the first benchmark index in the world’s 10 biggest stock markets by capitalization to fall into a bear market since Japan’s Nikkei-225 Stock Average sank more than 20 percent below its 2011 high on March 15 following the earthquake that damaged nuclear power plants.
Homebuilders, retailers, oil companies and steelmakers have been among the Bovespa’s biggest decliners since November’s peak.
Gafisa SA, Brazil’s third-biggest homebuilder by revenue, has plunged 51 percent since Nov. 4 as record-low unemployment drives up labor costs. B2W Cia. Global do Varejo, Brazil’s largest online retailer, is down 53 percent in that period. Banco Santander Brasil SA, the Brazilian unit of Spain’s biggest bank, declined 42 percent.
The Bovespa’s underperformance began last year. The index rose 1 percent in 2010, its worst-ever performance relative to MSCI Inc.’s gauge of 21 developing nations’ stocks, after rallying 83 percent in 2009 as Brazil recovered from the global financial crisis.
MSCI’s emerging-market benchmark has lost 0.2 percent since the Bovespa’s high on Nov. 4.
Brazil’s real has soared 49 percent since the end of 2008, the most among 25 emerging-market currencies tracked by Bloomberg, as the world’s second-highest inflation-adjusted interest rates lured investors. That has spurred a tug-of-war as policy makers sought to shore up exporters by weakening the currency, while rising interest rates lured dollars that strengthened it.
“The combination of inflation plus currency strength is creating some real issues,” said Lomax. “If they try to find ways to bring the currency down, these non-conventional approaches, that also ends up being bad for equities.”
Inflation reached 6.71 percent in June, according to the national statistics agency. The central bank has increased the benchmark interest rate 3.75 percentage points since April 2010 to 12.50 percent.
Finance Minister Guido Mantega, who has warned of a “currency war” between developed and emerging economies, in October tripled to 6 percent a tax on foreigners’ fixed-income investments in Brazil. Mantega had slapped a 2 percent tax on foreigners’ debt and stock purchases in 2009.
As part of the currency measures unveiled today, the government levied a 1 percent tax on some net short dollar positions by investors in Brazil’s futures market. The government may increase the tax up to 25 percent if needed, according to the decree signed by President Dilma Rousseff and published today in the Official Gazette.
The Bovespa trades at 9.5 times analysts’ earnings estimates, near the lowest since March 2009, according to data compiled by Bloomberg. That compares to a ratio of 10.9 for MSCI’s emerging-market benchmark, the widest gap in more than two years.