Brazil Stocks Slip Into Bear Market for Second Time in 2 Years

By Fabio Alves and Alex Ragir
July 25 (Bloomberg) -- Brazilian stocks fell into a bear market for the second time in two years, dragged down by the most aggressive interest-rate increases in emerging markets and declining commodity prices.
Brazil's Bovespa, until June the best-performing index among the world's 20 biggest markets with a 14 percent gain, slumped 3.3 percent to 57,434.37 yesterday, bringing the loss from its May record to 22 percent. A 20 percent drop is considered the threshold for the so-called bear market.
Banks led yesterday's sell-off after policy makers raised the benchmark lending rate by 0.75 percentage point to 13 percent, more than economists forecast and up from 11.25 percent in May. Higher borrowing costs and a 13 percent drop in the Reuters/Jefferies CRB Index of commodity prices from its peak combined to send the Bovespa down 10 percent in June and 12 percent this month.
``A major price correction in commodities will impair nations that are net producers, though it's still too early to tell if that's going to happen,'' said Walter ``Bucky'' Hellwig, who helps oversee $30 billion including Brazilian stocks at Morgan Asset Management in Birmingham, Alabama.
The Bovespa last entered a bear market in 2006, plunging 22 percent between May 9 and June 13, on concern inflation would force central banks to increase rates. The index recovered and posted an annual gain of 33 percent that year.
Brazil became the 23rd of 25 developing countries in the MSCI Emerging Markets Index to enter a bear market since October, with only Jordan and Morocco avoiding the slump. Among 23 developed nations in the MSCI World Index, only Canada hasn't fallen 20 percent or more.
`Extremely Poor'
``Global equity sentiment has been extremely poor,'' said Michael Hartnett, chief emerging markets equity strategist at Merrill Lynch & Co., who has an ``overweight'' rating on Brazil's stocks. ``People were taking profit in markets that they had profits to take, and Brazil was one of them.''
Energy producers and mining companies led the MSCI Brazil index lower during the past month, dropping 21 percent and 18 percent as crude oil fell from an all-time high of $145.29 a barrel on July 3 to $125.49 yesterday. Zinc plunged 27 percent from its May 16 record, while copper slid 9.5 percent.
Brazil's state-controlled oil company Petroleo Brasileiro SA and iron-ore supplier Cia. Vale do Rio Doce, which make up about a third of the Bovespa index, slid more than 33 percent since the commodities index peaked.
Bank Stocks
Financial stocks and retailers fell yesterday after the central bank increased the overnight lending rate for the third time in 2008 to fight the fastest inflation in 2 1/2 years.
``Overlapping with a slowdown in the rest of the world and weaker commodities prices, it takes away the appeal of investing in the country,'' Hellwig said.
Uniao de Bancos Brasileiros SA dropped 4.8 percent to 20.20 reais. Banco Itau Holding Financeira SA, Brazil's second-biggest non-state bank, dropped 4.1 percent to 32.90 reais. Lojas Americanas SA, the country's biggest discount chain, fell 1.6 percent, bringing its decline this year to 29 percent.
Gerdau SA slumped 6.1 percent and Usinas Siderurgicas de Minas Gerais SA lost 6.7 percent, leading a drop in steelmakers on concern demand for metals is slowing as copper, nickel and aluminum futures retreated. Mining and chemical companies, which together with energy producers make up 57 percent of the MSCI Brazil index, slid 4.6 percent to a four-month low.
``Growth will slow a bit,'' said Urban Larson, Latin American portfolio manager at F&C Management Ltd. in London, which oversees about $2.5 billion in stocks. ``I don't see the almost 6 percent type of growth of last year continuing.''