Brazil Short Sales Dry Up as Petrobras 65% Cheaper After Tumble

By Alexander Ragir

Dec. 18 (Bloomberg) -- Luciano Tavares beat 99 percent of rival fund managers in Brazil this year betting against the country’s biggest stocks. Now, he says, the best is over for so- called short sellers.

“The companies got cheap, a lot of the fat was trimmed,” said Tavares, 34, whose Sao Paulo-based Nest Mile High 30 Fundo de Investimento returned 28 percent this year and closed most of its short positions last month after shares on the Bovespa Index dropped to the lowest valuations on record. “Shorting makes a lot less sense” because stocks are more likely to rise than fall, he said.

The value of equity on loan, an indication of short- selling, slid 67 percent last month from June, according to data from Cia. Brasileira de Liquidacao e Custodia, which registers trades for Brazil’s BM&FBovespa SA exchange. As a percentage of market value, shares borrowed by investors fell 40 percent in Brazil between June and November compared with 14 percent worldwide, according to information compiled by Data Explorers Ltd. and Bloomberg. Short sellers borrow stocks and sell them in hopes of buying the shares back later at a lower price.

Investors increased bets against Brazil earlier this year as the Bovespa index climbed 14 percent through May, more than any other market, and profited when the index tumbled 45 percent. The country’s biggest company by market value, Petroleo Brasileiro SA, known as Petrobras, trades 65 percent cheaper than this year’s peak. Cia. Vale do Rio Doce, the world’s biggest iron ore producer, fetches a 13 percent discount to emerging-market mining companies.

No Rebound

While speculators may be closing bets against the companies, investors aren’t looking for a rebound. Falling commodity prices and the seizure in credit markets may cause Brazil’s economy, the largest in Latin America, to grow 2.2 percent in 2009, less than half this year’s pace, Deutsche Bank AG said yesterday.

The Bovespa, down 37 percent in 2008 after five years of gains, is unlikely to repeat the performance in 2009, said William Landers, who oversees $3 billion in Latin American equities at BlackRock Inc. in Plainsboro, New Jersey.

“Valuations have come down quite a bit in Brazil so you’d have to have a pretty dismal forecast for next year to think we could have another year like we had this year,” Landers said.

A total of 16 of the 66 stocks in the Bovespa trade for less than the value of their net assets, according to ratios compiled by Bloomberg. The index trades at 9.4 times earnings, compared with an average price-earnings ratio of 15.37 on Jan. 1. The valuations fell to a record low 6.99 times on Oct. 27, data collected by Bloomberg since January 2001 show.

Hedge Fund Withdrawals

Hedge fund withdrawals contributed to the drop in short sales. Investors pulled a record 51.9 reais ($22 billion) from Brazilian hedge funds this year as stocks plunged, according to the country’s National Association of Investment Banks. That shrank the industry by 17 percent. Brazilian hedge funds, known as multimercados, can invest across asset classes and wager on gains or declines.

“There were a lot of withdrawals from hedge funds around the world, especially in Brazil, and those were the people doing the shorting,” said Nest’s Tavares.

The value of Brazilian stocks on loan fell to 12.5 billion reais in November, the lowest since January 2007, from a record 37.7 billion reais in June, according to data from Sao Paulo- based Liquidaceo e Custodia. Borrowed stocks as a percentage of Brazil’s market value declined to 0.9 percent from 1.6 percent in the same period, Bloomberg data show.

Global Decline

On a global basis, the value of equities on loan as a percentage of market capitalization fell to 3.1 percent in November from 3.6 percent in June, according to data compiled by Bloomberg and Data Explorers, a London-based firm that collects securities lending data from more than 100 institutions.

Tavares, whose fund ranks 28th among 3,578 Brazilian hedge funds tracked by Bloomberg, said he profited from short-selling state-controlled oil company Petrobras and Vale, which both lost about half their value this year.

Rio de Janeiro-based Petrobras now trades for 6.8 times reported profit, 65 percent cheaper than its peak valuation this year and 15 percent less than the weekly average this decade, Bloomberg data show. Vale, also based in Rio, is valued at 5.6 times reported profit, a 13 percent discount to the average price-earnings ratio for companies in the MSCI Emerging Markets Materials Index, according to Bloomberg data.

“It’s hard to say how the crisis will play out, but it means we think there will be a short-term recovery,” said Tavares, a partner at Sao Paulo-based Nest Investimentos Ltda., which manages the equivalent of $207 million. Tavares said he’s now “slightly” net-long in Brazil.

Market Swings

The plunge in short-selling doesn’t mean the Bovespa will recover, said Eric Conrads at ING Groep NV in Mexico City.

Short-selling lost favor because credit markets froze and market swings increased, making the practice more expensive and risky, said Conrads, a Latin American hedge fund manager at ING Investment Management SA, which oversees $60 billion in assets and pension funds from the region.

The Bovespa rallied 36 percent since its Oct. 27 low. Retailers and homebuilders gained last week on speculation credit growth may rebound after the central bank signaled it may be ready to cut the benchmark lending rate from a two-year high of 13.75 percent to boost the economy.

Brazil’s stock market may climb 40 percent in 2009, Merrill Lynch & Co. said in a report last week.

“People are toying with the idea that the worst may be over,” said Fernando Aldabalde, whose GS Allocation Dinamico FI Multimercado hedge fund in Rio gained 15 percent this year, beating 97 percent of its peers. “Being net-short at this moment in time doesn’t seem like a very good idea.”

To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net;