Brazil extended its lead over the world's biggest equity markets in May, pushing prices to the highest level relative to earnings in four years and prompting analysts to cut ``buy'' ratings to the fewest since December.
The Bovespa stock index gained 12 percent this year, the steepest advance among the 20 largest markets, on record prices for the nation's iron-ore and oil and rising economic growth forecasts. The Standard & Poor's 500 Index, Japan's Topix, the U.K.'s FTSE 100 Index and China's CSI 300 all fell in 2008. The Bovespa jumped 5.8 percent in May, third behind the 14 percent rise in Russia's Micex Index and 6.1 percent advance in Argentina's Merval Index.
The Bovespa's climb pushed its average valuation to 16.8 times earnings, 61 percent above the level three years ago. Brazil's central bank raised interest rates last month for the first time in almost three years, while the percentage of analysts who recommend buying Brazilian stocks fell to 54.9 percent from 57.5 in April, data compiled by Bloomberg show.
``Brazil's been a great-performing market for quite a while but now when we look around the world we perhaps see more interesting earnings growth and valuations,'' said Deborah Medenica, who oversees $20 billion in emerging market equities at AIG Investments in New York. ``It doesn't make Brazil an unattractive market, just not as attractive as it has been.''
The Bovespa traded for 17.3 times its companies' average earnings on May 19, the highest since September 2004, according to data compiled by Bloomberg. The S&P 500, the benchmark index for American equity, trades at 23.4 times earnings. The MSCI World Index of 1,934 developed-market companies trades at an average 16.6 times profits.
Petrobras Rally
Petroleo Brasileiro SA, the state-controlled oil company, led the Bovespa's advance as Nymex crude futures rose to $135.09 on May 22, the highest since trading began in 1983. Rio de Janeiro-based Petrobras climbed 42 percent from its March low and surpassed Microsoft Corp. as the sixth-biggest company by market value.
Cia. Vale do Rio Doce, the world's biggest iron ore producer, jumped 21 percent since its March 20 low. The Rio de Janeiro-based company reached an agreement with ArcelorMittal, the world's largest steel producer, to increase charges for iron- ore 65 percent. Vale's price-earnings ratio rose to 16.5 on May 19, the highest in at least two years.
Brazil became the best-performing market April 30 after S&P raised its long-term foreign currency debt rating to investment grade for the first time. Four months earlier, Brazil became a net foreign creditor as demand grew for its metals, sugar and soybeans. Fitch Ratings upgraded Brazil's foreign-currency debt to investment grade yesterday.
`Most Attractive'
``It's still one of the most attractive markets in the world,'' said William Landers, who oversees $8.2 billion in Latin American stocks at BlackRock Inc. in Plainsboro, New Jersey. ``Brazil is still able to grow very well with high interest rates. You can kind of look at Brazil and see a steady 4 to 5 percent GDP grower for almost a decade.''
The median expectation for 2008 economic growth in Brazil increased in the last three weekly surveys of 100 economists by the central bank, rising to 4.7 percent from 4.66 percent. In the first week of the year economists expected 4.5 percent growth, according to the survey.
The Bovespa slipped 1.9 percent to 71,797.54 yesterday. The Dow average rose 0.4 percent, while the S&P 500 Index advanced 0.5 percent.
Higher Rates
Prospects for higher interest rates prompted some analysts and investors to turn more bearish on Brazil. The benchmark lending rate may rise to 13.5 percent this year, according to the median estimate in the central bank survey published May 26, higher than the 13.25 percent estimate in a poll earlier in the month.
Deutsche Bank AG cut its rating on Brazilian shares to ``neutral'' from ``overweight'' in a report dated May 21 on concern higher interest rates and reduced demand from China will slow economic growth.
Wagers that Petrobras American depositary receipts are overvalued jumped in the first two weeks of May to the highest level in seven months, according to Bloomberg data. Short interest, a gauge of bets against a stock, rose to a ratio of 2.64 percent, the highest since the last two weeks of September, the data show. Short sellers sell borrowed shares with the expectation of replacing them at a lower cost.
Petrobras' Sao Paulo-traded shares fetch 17.8 times earnings, more than twice its monthly average during this decade. Vale's ratio is 40 percent higher than a year ago.
``With Petrobras and Vale, we're a bit mindful at these levels and we've reduced holdings,'' Alexandre Vianna, who helps manage the equivalent of $7.2 billion in Sao Paulo at Suladis DTVM, a unit of SulAmerica Investimentos. ``But this is in the short-term. The future here holds a very good story.''
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