Ibovespa Rally Shows Investors Ignore Analyst Rating Cuts

Analysts are cutting ratings on Brazilian stocks faster than any other major emerging market. Investors aren’t listening.

The Ibovespa’s 20 percent gain in dollar terms in the past three months, the most among the world’s largest equity markets, runs counter to the downgrades that 39 of its 71 companies, or 55 percent, have received in the period. In China, 18 percent of the securities on the Shanghai Composite Index have fewer buy ratings now than they had in March, compared with 34 percent for Russia’s Micex Index and 40 percent for India’s Sensex Index.

While analysts have cut ratings on stocks from education company Kroton Educacional SA to shopping-center operator BR Malls Participacoes SA, the Ibovespa entered a bull market last month on speculation President Dilma Rousseff may be voted out of office. Investors are betting either Rousseff or a new administration will have to alter policies to bolster growth, said Rogerio Freitas, a partner at hedge fund Teorica Investimentos.

“Brazilian stocks have underperformed the rest of the world in the past few years mostly because of all the things this administration did wrong,” Freitas said by phone from Rio de Janeiro. “There’s no reason not to believe in a turnaround in equities amid signs that things may change.”

Cemig, Gafisa

Cia. Energetica de Minas Gerais is among the companies whose shares have rallied even as analysts cut their ratings. Investors should use the recent stock gain as a “chance to take profits” because the positive outlook is already priced into the shares, BTG Pactual analysts Antonio Junqueira and Joao Pimentel wrote in a research note yesterday. Cemig rose 27 percent this year before today, while the Ibovespa has climbed 5.3 percent.

Homebuilder Gafisa SA had the most downgrades of any Brazilian company, losing three of its five buy ratings in the past three months, data compiled by Bloomberg show. Competitors PDG Realty SA and Rossi Residencial SA were also downgraded.

Kroton and BR Malls declined to comment on the rating cuts. PDG Realty, Rossi and Cemig didn’t respond to e-mailed requests for comments.

Interventionist policies from Rousseff’s administration have hurt profits at companies including energy producers and power utilities, Freitas said. Brazil has forced state-run oil producer Petroleo Brasileiro SA to subsidize fuel imports and told electric companies seeking to renew licenses to cut power prices in a bid to curb inflation.

Rousseff’s press office declined to comment on the latest polls and their impact on the equity market.

Election Survey

An Ibope poll published on June 19 showed support for Rousseff’s re-election bid ahead of the Oct. 5 vote was 39 percent. The poll, commissioned by the National Industry Confederation, has a margin of error of 2 percentage points and interviewed 2,002 people nationwide from June 13 to June 15. While Rousseff holds a lead in the poll, the combined support of opposition candidates Aecio Neves and Eduardo Campos may be enough to force her to compete in a runoff election on Oct. 26.

The Ibovespa rose 0.1 percent at the close in Sao Paulo.

The benchmark gauge has lost 22 percent of its value since Rousseff took office in 2011, compared with a 30 percent rally in the MSCI All-Country World Index. Petrobras, as Petroleo Brasileiro is known, has slid 33 percent during the period, and the slump in utilities wiped out $24.2 billion of their market value in 2012.

Analysts have been wrong about the Ibovespa’s performance before. By the end of 2012, they predicted the gauge would gain 19 percent over the next 12 months, according to data compiled by Bloomberg. The index dropped 16 percent in 2013. The gap between the gauge’s performance and the analysts’ forecasts was the second largest among 45 countries tracked by Bloomberg.

‘Very Pessimistic’

While speculation that Rousseff won’t secure a second term in the October election has fueled a rebound in stocks, it may not be enough to make up for a weak economy, said Lenon Borges, head analyst at brokerage Ativa Corretora.

“We’re still very pessimistic about the economy,” Borges said in a phone interview from Rio de Janeiro. “The political outlook may be moving the market in the short run, but in the longer term what matters for our ratings is fundamentals.”

Latin America’s largest economy grew 0.2 percent in the first quarter, half the pace of the expansion recorded during the last three months of 2013. Inflation near the ceiling of the government’s target range adds pressure on the central bank to raise rates before October, according to Neil Shearing, chief emerging-markets economist at Capital Economics Ltd.

Borrowing Costs

Forecasting the outcome of the election and its impact on the economy would be too difficult of a task, so it’s not taken into account when rating a stock, said Nataniel Cezimbra, head equity analyst at Banco do Brasil SA. With the economy cooling down and borrowing costs rising amid tighter monetary policy, the outlook for companies is challenging, he said.

“We’re looking at long-term fundamentals,” Cezimbra said in an interview from Rio de Janeiro. “You can’t add short-term speculation to this process.”

Support for Rousseff’s re-election bid fell in the first half of the year as slower growth eroded her popularity. Still, near-record low unemployment and increased social welfare spending has helped her keep the lead as the World Cup captures the attention of voters, the Ibope poll showed last week.

“Brazil ticks every box of what a bottom would look like,” Michael Shaoul, the chief executive officer of Marketfield Asset Management LLC, which oversees more than $20 billion, said by phone from New York. “It’s not that there is any really good news in Brazil, it’s just that the market is now fully informed about all the really bad things.”

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