Brazilian Stocks Plunge on Credit Concerns, Led by Retailers

By Paulo Winterstein and William Freebairn

Oct. 2 (Bloomberg) -- Brazilian stocks plunged, sending the Bovespa index toward its biggest weekly decline in four years, as commodity prices slid and Citigroup Inc. told investors to sell consumer shares on concern the credit crisis will choke off borrowing and spending.

Lojas Renner SA led declines in retailers after Citigroup said Brazil is ``exposed to a drying-up of credit flows.'' Cia. Vale do Rio Doce, the world's biggest iron-ore producer, dropped after Merrill Lynch & Co. said slowing demand may lead to lower- than-expected ore price increases next year. Petroleo Brasileiro SA, Brazil's state-controlled oil company, tumbled as crude prices slumped for a second day.

``The dominant question is the scenario that's unfolding in the U.S.,'' said Guilherme Figueiredo, who helps manage about $1 billion at M. Safra & Co in Sao Paulo. ``The worse things get in the U.S., the worse the credit situation gets here.''

The Bovespa index dropped 3,653.55, or 7.3 percent, to 46,145.1, as only three of the 66 shares in the benchmark gained. The index has lost 9.1 percent this week, the steepest weekly retreat since April 2004. The BM&FBovespa MidLarge Cap index dropped 6.9 percent, while the BM&FBovespa Small Cap index fell 7.7 percent. Mexico's Bolsa declined 4.3 percent.

The Bovespa index lost 11 percent in September, the worst performance in more than four years, after mounting credit losses, the collapse of financial companies worldwide and a jump in banks' borrowing costs prompted investors to shun riskier assets, such as emerging markets stocks and bonds.

Credit Dries Up

``Brazil appears exposed to a drying-up of credit flows given high debt ratios, short term debt repayments and variable cash flow generation,'' Citigroup strategist Geoffrey Dennis wrote in a note to clients. He also downgraded energy stocks to ``underweight'' from ``neutral.''

Lojas Americanas SA, the biggest discount retailer, dropped 11 percent to 7.85 reais. Lojas Renner, the biggest publicly traded clothing retailer, fell 16 percent to 20.15 reais. B2W Cia. Global do Varejo, the largest Internet retailer, fell 11 percent to 42.10 reais.

Renner said Sept. 30 it had renegotiated its purchase of rival Leader SA Empreendimentos e Participacoes to avoid raising money in credit markets.

``The retailers are already feeling'' the effects of costlier credit, Figueiredo said in a phone interview. ``They're going to have to start using their own capital and de-leverage one way or another.''

Jobless Claims

The cost of borrowing in dollars in London for three months rose for a fourth day, signaling that banks haven't started to lend after the U.S. Senate approved a $700 billion plan to rescue beleaguered financial institutions. In the U.S., jobless claims climbed to a seven-year high and factory orders slumped more than economists forecast. Brazil's industrial output fell 1.3 percent in August, the first drop this year, as the economy showed signs of cooling.

Gafisa SA, Brazil's second-biggest homebuilder, dropped 14 percent to 20.57 reais, leading declines among real estate developers. Along with retailers, builders may suffer from higher credit costs because of the large amounts of cash flow needed to fund operations.

Cyrela Brazil Realty SA Empreendimentos e Participacoes, the biggest Brazilian homebuilder, fell 8.9 percent to 17.95 reais. Rossi Residencial SA, the third-biggest, dropped 9.4 percent to 4.52 reais.

Ore Prices

Vale slid 10 percent to 29.40 reais. Australian producers, including Rio Tinto Group and BHP Billiton Ltd., may win a 10 percent jump in contract prices, down from a previous estimate of 15 percent, Merrill Lynch analysts led by Vicky Binns said in a report dated yesterday. Vale may not get an increase next year, assuming it wins a planned 12 percent raise this half, she said.

Petrobras fell 8.2 percent to 32.05 reais. Oil dropped more than 4 percent as the dollar reached a one-year high against the euro and U.S. fuel demand dropped to the lowest since the last recession.

Mexico's Bolsa index fell for the first time in three days, as copper miner Grupo Mexico SAB dropped with metal prices.

Grupo Mexico, the country's biggest mining company, fell for the third time this week. Copper tumbled to a 19-month low in New York.

Spending Concern

Retailers fell, led by Grupo Famsa SAB and Controladora Comercial Mexicana SAB on concern slowing consumer spending will curb profits. Famsa fell to a two-year low after Citigroup Inc. downgraded the stock to ``hold'' from ``buy,'' citing high levels of debt and concern a prolonged slowdown will hurt sales. Comercial Mexicana declined for the first time in three days as Credit Suisse Group AG said its September sale growth lagged behind that of competitors.

Grupo Mexico fell 8.9 percent to 10.32 pesos. Famsa declined 5.4 percent to 21.96 pesos. Comercial Mexicana dropped 6.9 percent to 24.36 pesos.

Sociedad Quimica y Minera de Chile SA fell the most in 13 years in Santiago trading on concern slowing global growth will stifle demand for the fertilizer it produces. Soquimich, as the company is known, fell 16 percent to 11,789 pesos.

In other Latin American markets, Argentina's Merval index dropped 5.3 percent, Chile's Ipsa fell 3.9 percent, Colombia's IGBC slipped 0.9 percent and Peru's Lima General index dropped 4.4 percent. The MSCI index of Latin American shares tumbled 9.3 percent.

To contact the reporters on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net; William Freebairn in Mexico City at wfreebairn@bloomberg.net.