Bovespa Beats Biggest Stock Markets on Brazil Consumers, Steel

By Michael Patterson and Alexander Ragir
March 3 (Bloomberg) -- Brazil's Bovespa Index is beating the biggest stock markets this year on the fastest retail sales growth since at least 2001 and rising global demand for the country's metals, oil and sugar.
The Dow Jones Industrial Average, Japan's Nikkei 225 Stock Average, the U.K.'s FTSE 100 Index and benchmarks from the six other largest equity markets fell more than the Bovespa, which lost 0.6 percent so far this year, according to data compiled by Bloomberg. The Bovespa gained 6.7 percent in February, the best among the biggest markets' indexes, and Brazil's market value rose above $500 billion, surpassing China as the largest emerging market, MSCI Inc. data compiled by Citigroup Inc. show.
The 64-member index overtook the Dow average, the best performer in January, led by gains in Gerdau SA, Brazil's biggest steelmaker, and Cia. de Bebidas das Americas, the country's largest brewer. The Bovespa trades at 14.8 times its members' reported profit, compared with 15.9 for the MSCI Emerging Markets Index, data compiled by Bloomberg show.
``We still see plenty of upside for these stocks,'' said William Landers, a fund manager at BlackRock Inc. in Plainsboro, New Jersey, who invests about 70 percent of the $7.8 billion in Latin American assets he manages in Brazil. ``Brazil still looks very attractive from a valuations perspective.''
Net Creditor
Brazil became a net foreign creditor for the first time this year, inflation dropped to a seven-month low in February and the nation's benchmark interest rate is at a record low 11.25 percent following two years of cuts. Bank lending grew 27 percent in December from a year before, the fastest pace in 12 years, helping spur demand for cars, homes and furniture, according to Brazil's central bank.
The nation's currency, the real, strengthened to the highest in nine years against the dollar last week. The real rose about 4 percent against the U.S. currency this year, boosting dollar-based returns on the Bovespa to 4.5 percent, also the best among the world's 10 biggest equity markets.
Investors may be underestimating the possibility of higher interest rates in Brazil and a slowdown in earnings growth should the U.S. slip into a recession, according to Geoffrey Dennis, a New York-based Latin America equity strategist at Citigroup. Brazilian shares are expensive, Dennis wrote in a Feb. 25 research note.
The Bovespa's price-to-earnings ratio increased 7 percent last month and is up 27 percent since the end of 2005.
`Priced In'
``There's still a lot of positive things going on, but it is much more priced in than it had been historically,'' said David Lazenby, who oversees $6 billion in emerging-market equities and manages the Legg Mason Emerging Markets Trust from Boston. Lazenby reduced his holdings in Brazil at the beginning of the year.
Growth in Brazil will weaken and the economy is expanding at about half the rate of larger markets including China, according to economists in a Bloomberg survey conducted Nov. 21 to Dec. 5. Brazil's gross domestic product may expand 4.4 percent in 2008, down from 4.9 percent last year, the survey said.
Morgan Stanley, the third-biggest U.S. securities firm by market value, estimates Brazilian companies will report 21 percent earnings growth this year, compared with 16 percent growth in emerging markets as a whole.
Porto Alegre-based Gerdau climbed 6.4 percent this year on expectations earnings will rise as the company secures supplies of iron ore. Morgan Stanley estimates global steel prices will rise 19 percent in 2008.
Petrobras Rallies
Petroleo Brasileiro SA rebounded 23 percent from a three- month low on Jan. 21 as crude futures climbed to a record $103.05 a barrel in New York last week and the company discovered a natural-gas field that may be large enough to meet domestic demand. Preferred shares of the Rio de Janeiro-based state-controlled oil company account for about 13 percent of the Bovespa's value and helped the index rally from a 2008 decline of as much as 16 percent.
Cosan SA Industria e Comercio, the world's biggest sugar- cane processor, advanced 39 percent this year on rising demand for sugar-based ethanol as a substitute for gasoline. Sugar prices rose 32 percent in 2008. Cosan is based in Piracicaba.
Companies catering to the domestic market also are gaining. Ambev, the Sao Paulo-based unit of Belgium's InBev NV, said last week that fourth-quarter profit excluding some expenses climbed 20 percent as Latin American customers bought more beer and soft drinks. The company's shares climbed 8.5 percent this year.
Cyrela Brazil Realty SA Empreendimentos e Participacoes, Brazil's largest real estate company, rose 12 percent in 2008 after the company raised a revenue forecast and Goldman Sachs Group Inc. advised clients to buy the stock because of ``pent-up demand for homes'' in Brazil. Cia. Brasileira de Distribuicao Grupo Pao de Acucar, the biggest Brazilian food retailer, has gained 7 percent.
``Domestic demand is taking off,'' said Geoffrey Pazzanese, who helps manage $44 billion at Federated Investors Inc. in New York and is ``overweight'' Brazil.