Brazil Smallcaps to Overtake Vale, Petrobras, Aberdeen Asserts
By Alexander Ragir
Nov. 14 (Bloomberg) -- Fund managers at Aberdeen Asset Management and Bassini & Co. have missed much of this year's rally in Brazilian stocks because they sold shares of the largest companies and bought those 10 percent or less the size.
The Bovespa Index has surged 41 percent this year, led by Cia. Vale do Rio Doce and Petroleo Brasileiro SA, the two biggest by market value. They are worth more than $160 billion each, which would put them among the 12 largest members of the U.S. Standard & Poor's 500 Index. A Brazilian measure that excludes the 10 largest Bovespa members rose less than half as much.
The gap widened in the past three months as investors bought the best known companies to get back into emerging markets after global equities fell in August. Smaller businesses are now becoming bargains. The average price of the country's Second Tier Index compared with earnings has fallen 27 percent this year.
``After a while the money will start chasing the stocks that have underperformed,'' said Gustavo Pozzi, who helps manage $200 million at New York-based Bassini & Co., a hedge fund that sold its Vale holdings last month. ``Global investors have just been focusing on the most liquid stocks.''
Pozzi's purchases -- Fertilizantes Heringer SA, a fertilizer maker in Viana, and Sao Paulo-based real estate developer Sao Carlos Empreendimentos e Participacoes SA -- have underperformed the Bovespa since he bought them in early October. Vale, the world's biggest iron-ore producer, has 138 times the market value of those two companies combined.
Underperformer
The largest company in the Second Tier Index, Rio de Janeiro-based Centrais Eletricas Brasileiras SA, Brazil's state- controlled utility company, has a market value of $17.2 billion. It lagged behind the benchmark this year, rising 7.1 percent.
Fiona Morrison at Aberdeen, U.K.-based Aberdeen Asset Management, Christopher Palmer at Gartmore Investment Management and Urban Larson at F&C Investments in London, who together help manage $14 billion in emerging market equities, favor smaller companies. They can grow faster and benefit more from Brazil's record low interest rates, rising incomes, credit expansion and infrastructure spending, Palmer said by telephone from Gartmore's offices in London.
``Large stocks tend to run up on global thematic interest,'' said Palmer, who helps manage $3.5 billion. ``There's no real reason why they should outperform.''
Oussama Himani, UBS AG's London-based emerging market strategist, recommended last month that investors sell Vale and buy Perdigao SA, which has 2.6 percent the market value. So- called small caps are bound to catch up, he said.
`Clearest Cases'
Perdigao and real estate developer Cyrela Brazil Realty SA Empreendimentos e Participacoes, both based in Sao Paulo, have joined the Bovespa's leaders this quarter, rising 12 percent and 19 percent respectively.
``Brazil stands out as one of the clearest cases where small caps have lagged despite strong fundamentals,'' Himani wrote in the Oct. 5 report, in which he upgraded Sao Paulo-based Banco Cruzeiro do Sul SA, a bank with a market value of $1.39 billion that has risen 7.8 percent in 2007.
Three quarters of the 287 emerging market funds based in Europe and North America tracked by Bloomberg have missed the 36 percent rise of the Morgan Stanley Capital International Emerging Markets index this year.
They lost out on much of the rally in Brazilian stocks because they owned fewer shares of the largest raw material companies compared with their benchmark indexes, said Michael Hartnett, Merrill Lynch & Co.'s chief emerging markets strategist, in a telephone interview from New York.
Wanting Out
Managers of global funds increased their ``overweight'' positions in emerging markets to the most in three years to insulate against a U.S. economic slowdown, he said. Overweight means holding more of a stock than is in a benchmark index.
``What you saw was global money bidding up particularly material and energy stocks,'' said Hartnett. ``Global investors basically said, `I want out of dollars and into commodities, and China, and anything related to that.'''
Betting against the biggest companies now is a mistake, said Nudgem Richyal, who helps manage $48 billion in equities as international fund manager at Baring Asset Management Inc. in London.
``Local investors are chasing their tails when these stocks are flying,'' he said. He bought Vale and Petroleo Brasileiro, the state-controlled oil company, this quarter.
Market Movers
The two Rio de Janeiro-based companies still sell for less than competitors in industrialized nations, he said. Vale trades at 11.7 times estimated earnings. London-based Rio Tinto Group, the world's third-largest mining company, trades at a price-to- earnings ratio of 18.8 and BHP Billiton Ltd. of Melbourne, the biggest mining company, has a 13.2 P/E ratio.
Petrobras, as Petroleo Brasileiro is known, and Vale accounted for half of the Bovespa's gain this year. Petrobras surged 56 percent, including a 31 percent gain since Oct. 1, and Vale rose 90 percent.
``It's been an unusual rally,'' said Larson, who helps manage $2 billion as a Latin American fund manager at F&C in Boston. ``The market has been so narrow and the big stocks have done particularly well. That leaves them more exposed to a pullback.''
The past month suggests the decline may have begun. Vale has fallen 7.3 percent since Oct. 1, as JPMorgan Chase & Co. and Zurich-based UBS downgraded the shares.
Morrison, who manages $8 billion at Aberdeen in London, has been selling Brazil's largest stocks and buying those that listed this year. Among them: Cremer SA, a Blumenau-based medical supply maker, and Multiplan Empreendimentos Imobiliarios SA, Brazil's largest shopping mall company by sales, which is based in Barra Da Tijuca Rio De Jan. They have risen 12 percent and 3.8 percent since their IPOs in April and July.
``There's been a lot of hot money, in terms of hedge funds, because these stocks have much more liquidity,'' she said of the large resource providers. ``The smaller companies we like have sustainable earnings growth, based on domestic demand, and are much better long-term investments.''
To contact the reporter on this story: Alexander Ragir in New York at aragir@bloomberg.net |
