Stock investors cautiously tiptoe back into Brazil

Reuters

By Guillermo Parra-Bernal and Walter Brandimarte

SAO PAULO/RIO DE JANEIRO, Oct 18 (Reuters) - After bettingfor most of the year that Brazilian stocks would continue totank, some investors are now cautiously looking foropportunities to buy into a market that might have just becomecheap enough.

But calls to deploy money into Brazilian shares still lackconviction. For now, analysts are recommending that investorshunt for bargains or cherry-pick shares in companies that couldbenefit from an expected rebound in emerging markets.

Investors have reasons to be skeptical about Brazil, amarket whose performance this year has trailed that of somedeveloped nations still grappling with the impact of the 2008financial crisis. Mounting state meddling in the economy, signsthat the country's growth model is fatigued and politicaluncertainty have kept many investors on the sidelines.

Brazil's benchmark Bovespa stock index currentlytrades near 56,000 points, more than 20 percent off the 73,000points it reached in September 2010. The index is down almost 10percent for the year despite a sizzling 25 percent rally sinceJuly that took it into bull market territory.

"Some price signs are encouraging, but you don't feel thatconviction has yet taken hold with market participants," saidPaulo Bylik, who oversees 9.5 billion reais ($4.4 billion) inassets for Rio Bravo Investimentos in São Paulo. "We are farfrom a consensus on Brazil being a 'buy now' call."

Foreign investors have poured over $11 billion into the SãoPaulo Stock Exchange since the start of the year, and the natureof those inflows shows a tentative improvement in marketsentiment toward Brazil.

During the first six months, investors built massiveshort-selling positions, betting that stock prices would fallfurther. Now, data from bourse BM&FBovespa SA showsthat foreigners are becoming more optimistic about marketprospects in Brazil, with long positions on index futuresoutweighing short positions by a slight margin.

Still, according to Credit Suisse Securities, recent inflowshave gone mostly to exchange-traded funds - a strategy usuallyused by institutional investors willing to increase exposure tothe country without strong bets on any particular stock.

LITTLE CONVICTION

Bylik forecast that long-term-oriented investors such ascountercyclical endowments are likely to jump in as moreattractive entry points arise. "But there is still an issue withconfidence across the board," he noted.

So far, few investors have been making a positive case forBrazil, even though most of them currently have above-averageholdings of Brazilian assets, according to HSBC Securitiesstrategist Ben Laidler.

"Brazil is now a consensus overweight on a low conviction,focused on domestic stocks, but mainly driven by underweightcalls in other emerging markets such as China, Taiwan and SouthKorea," Laidler said.

Yet, market conviction is improving, said Marcos Paolozzi,who helps manage 6.5 billion reais in assets for FatorAdministradora de Recursos in São Paulo. He cites recent policystatements that are bolstering credibility and a stabilizationin earnings estimates trends as "the catalysts that investorsneeded to see before placing bets again on Brazil."

For some foreign investors, returning to Brazil took timebecause the losses of recent years caught them off guard,Paolozzi added. Yet some of them recognize the enormous upsidepotential the market has, he said.

'EVERYTHING HAS A PRICE'

JPMorgan Securities strategists calculate that Brazil sharesare now trading at 11.1 times 12-month earnings estimates, belowthe 11.7 times for global emerging markets. For 2014, JPMorgansees Brazil's price-to-earnings ratio at 10.8 times estimatedearnings, compared with 14.5 times for the United States and10.5 times for global emerging markets.

"Brazil remains fairly unattractive, unless the worldeconomy picks up and commodity prices go up again," said JohanKahm, who oversees $200 million in emerging and frontier marketsat FMG Funds. "But everything has a price. If you buy Brazilianshares at 5 times earnings, that's attractive."

That investors are basing their decisions to enter Brazil onprices is a stark contrast to the must-have status the countryenjoyed at the onset of the 2008 crisis. At that time, investorswould be comfortable buying stocks trading above 20 timesearnings, Kahm recalled.

After 2010, when the economy expanded at the fastest pace in24 years, Latin America's largest country failed to live up toexpectations. Since 2011, growth has averaged about 2 percentannually and erratic policy decisions have hampered confidence,leading strategists to rate Brazil's equity market a "sell."

Trends in the Bovespa and episodes such as the downfall oftycoon Eike Batista's Grupo EBX provide a good measure of thecountry's fall from grace - and its tentative stabilization.

OGX Petróleo e Gas Participações SA, once EBX'sflagship company, has shed 93 percent of its value in the pastyear on concerns it may go bankrupt due to delayed output andmounting debt. The slump in OGX, apart from weighing downforeign and local investor confidence in Brazil, dragged downthe Bovespa because of the stock's heavy weighting in the index.

BM&FBovespa recently rushed to enact changes in the way theBovespa is calculated - the first broad changes in the index's45 years of existence. The changes, which will take effect inMay, are aimed at preventing problems such as OGX's woes fromaffecting the market as a whole.

Much of the Bovespa's recent rally could also be attributedto a delay in the expected unwinding of U.S. stimulus measures,which for years have supported global appetite for risk. Betsthat the U.S. Federal Reserve may postpone a tapering of itsbond buying program, if proven correct, would most likely boostemerging markets in general, Brazil included.

"A number of market situations - the Federal Reserve'staper-off, or the impact of the woes facing tycoon EikeBatista's group - offer some decent entry points," Bylik said.

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