Bovespa to Hover at 60,000 After Correction, BNY Mellon Says

By Paulo Winterstein

Oct. 29 (Bloomberg) -- Brazil’s Bovespa stock index probably will hover around 60,000 through Dec. 31 after a correction halted the gauge’s biggest advance in 15 years, according to BNY Mellon ARX Investimentos.

The Bovespa slid 4.8 percent yesterday to 60,162.31, extending a retreat from last week’s 12-month peak to 11 percent, beyond the 10 percent threshold that defines a so- called correction.

Brazilian stocks’ plunge in the past seven days, the most among the world’s 30 biggest markets, came after the government imposed a 2 percent tax on international purchases of stocks and fixed-income assets to stem a gain in the currency. The measure had jumped 79 percent this year through Oct. 19, the best performance as of that date since 1994, on signs Latin America’s largest economy is recovering faster than most nations.

“We have two months until the end of the year and a good part of positive news about an economic recovery and a better year in 2010 has already been priced in,” said Rogerio Poppe, who helps manage 9 billion reais ($5.1 billion) in assets at BNY Mellon in Rio de Janeiro. “This level of 60,000 is reasonable until expectations for improvement are corroborated.”

The so-called IOF tax contributed to the drop as a sign to foreign investors that “you’re not welcome here,” said Paulo Possas, chief executive officer of Eagle Capital in Sao Paulo.

“The IOF was deadly for the bourse,” Possas, who helps manage $60 million, said in a phone interview yesterday. “Someone that may have entered Brazil after a drop produced good prices now probably won’t come back to the market.”

Valuations

International investors helped fuel the Bovespa’s rally this year on speculation record low interest rates, rebounding consumer demand and rallying commodity prices will fuel economic growth. The surge sent the index to 25.4 times the reported profit its companies last month, the highest in at least five years. It trades now for 24.9 times earnings.

“We’re living in a world with a lot of uncertainty and some industries are already trading at levels above pre-crisis multiples,” said Roni Lacerda, who helps manage 2.4 billion reais at Mercatto Gestao de Recursos in Rio de Janeiro.

Estimated profit growth for next year is already reflected in Brazilian stock prices and investors are looking for signs of when central banks will begin raising interest rates to curb inflation, Poppe said.

Stimulus Plans

The MSCI Emerging Markets Index capped its biggest three- day slide in four months yesterday amid concern that central banks may rein in stimulus spending that has helped spur a recovery from the global recession. China’s Banking Regulatory Commission said yesterday that it plans to tighten rules for personal loans, while India began taking steps this week to withdraw its record monetary stimulus.

A rise in U.S. interest rates could lead investors to abandon so-called carry trades that are creating a “huge” asset bubble, New York University professor Nouriel Roubini said this week. In a carry trade, investors borrow in countries with low interest rates to invest in higher-yielding assets.

The Bovespa may decline to as low as 58,000 points, or a 14 percent drop from the Oct. 19 high, after which it may bounce back to end the year above 60,000, according to Gyorgy Pavetits, a fund manager at Foco Asset Management Ltda.

“With this decline to below 61,000 you start to have some stocks that look attractive, like some of these stocks with less liquidity that have fallen more than 20 percent from recent highs,” he said.

Brazilian stocks have more room to fall in the “short term,” said James O’Leary, portfolio manager for the Touchstone International Growth Fund, part of Reno, Nevada-based Navellier & Associates, which manages $3 billion. He owns Petroleo Brasileiro SA, the state-controlled oil company, and Vale SA, the world’s biggest iron ore producer.

“These giant gains can’t continue forever,” he said. “This is a reminder that Brazil is still just an emerging market.”

To contact the reporter on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net.