Brazil's Stock Bulls Retreat During Longest Selloff in Decades

  • Bullish calls fade as largest emerging markets see increase
  • Analysts bet on exporters, banks, education companies for 2016

Brazil’s stock market had another awful year, and things don’t look a whole lot better for 2016.

The Ibovespa posted its fifth straight year of losses when measured in dollars, the longest rout since at least 1992, as the outlook for Brazil’s recession worsens amid a graft probe, political turmoil, a junk credit rating and a commodity plunge. While the slide sent valuations tumbling, many analysts aren’t yet convinced it’s time to bet on a recovery in shares from Latin America’s largest economy.

Bullish calls on Brazilian equities dropped to 787 on Wednesday from 861 when the rout started five years ago, according to data compiled by Bloomberg based on more than 24,000 recommendations for the largest developing countries. Buy ratings for stocks in Russia, India and China have all increased in the period.

“We’re living through an unprecedented lack of confidence,” Adeodato Volpi Netto, the head of capital markets at equity research firm Eleven Financial, said from Sao Paulo. “That’s why the Ibovespa is suffering so much.”

Only four of the 63 stocks in the equity benchmark posted gains in dollars this year, a list that includes three pulp and paper exporters that benefited from the currency’s 33 percent slide and petrochemical company Braskem SA. The real has lost 58 percent of its value against the dollar over the past five years, the most among 16 major currencies.

Metalurgica Gerdau SA, the parent of Latin America’s biggest steelmaker, Usinas Siderurgicas de Minas Gerais SA, a producer of steel used by automakers, and Bradespar SA, which holds interests in companies such as miner Vale SA, all tumbled at least 75 percent in dollars this year. Gol Linhas Aereas Inteligentes SA retreated 89 percent after cutting its profitability outlook as the real’s plunge increased the financial burden on Brazil’s biggest airline. Oi SA, the nation’s most-indebted telecommunications company, plummeted 82 percent. The Ibovespa fell 42 percent.

The slide in the Ibovespa drove its valuation to 1 time its book value, or assets after subtracting liabilities, according to data compiled by Bloomberg. While that’s about half the average multiple of global stocks, it’s still not enough to entice many analysts and traders as the economy heads toward its longest recession since the 1930s and President Dilma Rousseff’s administration struggles to shore up the budget and avoid further rating downgrades.

“Stocks are not cheap enough to make up for the very hard scenario that companies may face in the next 12 months and after that,” Gabriela Santos, a global markets strategist at JPMorgan Chase & Co., said in an interview in Sao Paulo. "In other words, the investor is not being enough rewarded for the risks."

For next year, exporters should still outperform amid a depreciated of the Brazilian real, according to Jason Vieira, the chief economist at Infinity Asset Management, which oversees 200 million reais ($50.5 million). Pulp producers Fibria Celulose SA and Suzano Papel e Celulose SA as well as meatpackers JBS SA and Marfrig Global Foods, SA are expected to do well, he said.

Investors should still remain very selective and pick companies that tend to outperform during recessions, such as banks and for-profit education shares, said Eleven Financial’s Volpi Netto.

“Quality will be the name of the game,” he said. “Banks’ operations continue to be very profitable in any scenario because Brazil’s financial system is very solid. And selected education companies are a good bet as they sought alternative financing sources to get less dependent on public support.”

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