Brazil Stocks Lure Most Foreign Inflows in a Year: Week Ahead

By Paulo Winterstein
May 4 (Bloomberg) -- Brazilian equities are attracting the most international investment in a year as speculation that Latin America’s largest economy will rebound prompts fund managers to overlook the priciest valuations since 2003.
Foreign investors bought 3.4 billion reais ($1.6 billion) more in stocks than they sold last month, the largest monthly net inflow since April 2008, according to data compiled by the Sao Paulo-based exchange BM&FBovespa SA through April 27. The bourse is scheduled to post the full-month figures tomorrow.
Federated Investors Inc. and Russell Investments, which oversee more than $540 billion, say falling interest rates, government stimulus plans and increased demand for Brazil’s oil, iron ore and steel indicate the economy will recover after its biggest contraction in at least a decade. The benchmark Bovespa index rose 26 percent this year after tumbling a record 41 percent in 2008, pushing up the measure’s price-to-earnings to almost 1.3 times the MSCI Emerging Markets Index’s valuation.
“We are looking at P/E, but relative to other countries we’re not too concerned,” said Audrey Kaplan, who helps manage $23.4 billion in equities at Federated in New York and has been buying Brazil stocks since the second half of last year. “We’re looking at growth. We’re looking at quality balance sheets at the country level. We’re looking at fiscal policy.”
More Trading
International investors bought more equity than they sold for the first time in February after the global financial crisis spurred almost 26 billion reais in withdrawals from June through January. As of April 27, foreign investors had bought 31.4 billion reais in stock and sold 28 billion reais, according to exchange data.
They also are increasing their share of trading in Brazil, accounting for 36.3 percent of daily volume, according to the Bovespa Web site. That’s the highest percentage since October, when international investors took out more than 4.6 billion reais from the market in the aftermath of the collapse of New York-based Lehman Brothers Holdings Inc.
“You don’t want to wait until things turn wholeheartedly in terms of GDP because then the markets have already moved,” said Rob Balkema, a portfolio analyst at Tacoma, Washington- based Russell Investments, which manages $136 billion. Fund managers at his firm have been buying Brazil shares since the beginning of 2009 after reducing holdings last year, he said.
Brazilian equities are rallying just as profits tumble and analysts cut 2009 earnings projections. Analysts reduced 2009 profit estimates last month to the lowest level since Bloomberg began compiling the data in 2006 as Brazilian companies scaled back output. The country’s economy shrank 3.6 percent in the fourth quarter, the most since the national statistics agency’s series began in 1996.
Earnings ‘Uncertainty’
The Bovespa’s rally sent its P/E ratio to 15, the highest since July. Shares in the MSCI Emerging Markets Index fetch an average 13 times profit. The Brazil index’s premium over the MSCI gauge rose to the highest since December 2003 during the week ended April 3.
“You don’t know where the ‘E’ is going,” Balkema said. “Uncertainty in the earnings is definitely the case.”
Russell has been purchasing Brazilian commodities and energy producers, as well as some homebuilders and financial stocks, on speculation the economy will recover in the second half of this year, Balkema said in a phone interview.
Lower Rates
Brazil’s central bank likely will cut the benchmark interest rate to 9.75 percent by the end of this year, from 13.75 at the beginning of 2009, according to yields on Brazil’s overnight futures contracts. Policy makers reduced the rate 1 percentage point to 10.25 percent on April 29.
Falling borrowing costs and tax cuts on automobiles, household appliances and construction materials should bolster Brazil’s domestic growth, according to Kaplan, who has about 7 percent of her portfolio in Brazilian stocks, double her MSCI benchmark of about 3 percent.
Kaplan said she’s buying Brazil shares on prospects for a recovery beyond 2009.
“Maybe in the short term we haven’t hit the bottom in Brazil, but I’m already looking out beyond that,” she said. “We’re being cautious, but looking for the best long-term growth opportunities.”
Stocks, Bonds, Currency
The Bovespa index gained 1.1 percent last week, led by gains in homebuilders Rossi Residencial SA, which jumped 19 percent, and Gafisa SA, which added 10 percent. Eletropaulo Metropolitana SA, which distributes electricity to Brazil’s largest metropolitan area, led declines, falling 13 percent.
Local-currency bonds rose, pushing yields to a two-week low, as investors bet policy makers will keep cutting interest rates. The yield on Brazil’s zero-coupon bonds due January 2010 fell to 9.77 percent for a weekly drop of 20 basis points.
Brazil’s real fell 0.3 percent last week to 2.1905 per U.S. dollar.
The following is a list of events in Brazil this week:
Event Date Trade Balance May 4 Banco Bradesco 1Q Earnings May 4 Industrial Production May 5 Itau Unibanco 1Q Earnings May 5 Tim Participacoes 1Q Earnings May 5 Monetary Policy Meeting Minutes May 7 IPCA Inflation May 8 Vehicle Sales May 8