Brazil Stocks Surpass $1 Trillion on Metals Rally - Bloomberg

Brazil Stocks Surpass $1 Trillion on Metals Rally (Update4)
By Paulo Winterstein

June 4 (Bloomberg) -- Brazil's stock market became the first in Latin America to top $1 trillion after surging metals prices helped double corporate profits.

The overall value of Brazilian equities rose to $1.02 trillion on June 1 after the Bovespa index rallied 2.2 percent. The gauge has climbed 45 percent in the past year and more than quadrupled since 2002, helped by a stronger currency.
Profits have risen 108 percent during the four-year rally, according to research company Economatica, buoyed by rising prices of nickel and iron-ore. Foreigners also have increased investment on speculation economic growth will accelerate. International investors accounted for 34 percent of shares traded this year, up from 22 percent in 2000, according to the Sao Paulo Stock Exchange.
``Brazil provides growth opportunities that investors went through in other markets,'' said Fabio Spinola, who helps manage 1.7 billion reais in assets at Quest Investimentos in Sao Paulo. ``Investors are buying that expectation.''
The real's 35 percent advance against the dollar since June 2002 has given a further boost to the country's dollar- denominated market value. The currency has jumped 19 percent the past year, the best performance among the 16 most-traded currencies.
The Bovespa fell 0.3 percent to 53,242.68 as of 4:17 p.m. New York time. The index is valued at 13.7 times profits over the last 12 months, about one-quarter its average since 2000. The Standard & Poor's 500 Index in the U.S. fetches 18 times its members' earnings.
Russia, India, China
Brazil is the fourth member of the so-called BRIC group of emerging markets -- Brazil, Russia, India and China -- to reach $1 trillion in overall market value. Russia surpassed it in 2006 and China and India followed this year.
Growing demand for nickel and iron-ore from China and an expanding domestic economy helped push up earnings at companies such as Cia. Vale do Rio Doce, Brazil's second-largest company by market value. Vale said May 3 first-quarter profit jumped 85 percent after it negotiated a 9.5 percent increase in iron-ore prices and nickel prices doubled from the year earlier period.
``We're seeing growth in a lot of blue-chip Brazilian companies,'' said Audrey Kaplan, who manages $2.3 billion in global stocks at Rochdale Investment Management in New York. ``They're able to sell their product well and make good profits.''
The market capitalization of Vale, the world's biggest iron- ore producer, jumped almost 50 percent since the beginning of the year, topping $100 billion in May after opening the year at $70 billion, according to Einar Rivero, economist at Economatica.
The purchase of Canadian nickel miner Inco Ltd. last year boosted Vale as nickel prices climbed 40 percent in five months.
Chinese Demand
``It's China that's responsible for all this,'' said Rodrigo Ferraz, steel and mining analyst at Brascan Corretora in Rio de Janeiro. ``China continues to grow enormously, and Brazil has a lot of reserves of materials it needs.''
Economic growth in China, the world's biggest consumer of nickel, accelerated to 11.1 percent in the first quarter from 10.4 percent in the previous three months.
Brazil's economy is expected to grow 4.2 percent this year, compared with 2.9 percent in 2006 and 2.3 percent in 2005, according to the median estimate of about 100 economists in a June 1 central bank survey.
Lula Administration
President Luiz Inacio Lula da Silva, who was elected in 2002 as the Workers' Party candidate, launched a program this year to accelerate growth. Brazil's annual inflation rate has dropped to 3 percent from 14.5 percent in January 2003, when Lula took office, helped by spending cuts and a stronger currency.
Other Brazilian mining companies such as MMX Mineracao & Metalicos SA and Cia. Siderurgica Nacional benefited from demand for Brazil's metal commodities. The share price of MMX, the mining company controlled by Brazilian billionaire Eike Batista, has more than doubled since the beginning of the year. The company was worth 8.5 billion reais as of May 28.
A planned public offering of shares in an iron-ore mine controlled by CSN, as Brazil's third-largest steelmaker is known, has helped push up the stock more than 50 percent this year. CSN said May 11 it hired Banco de Investimentos Credit Suisse SA to evaluate the sale of the Casa de Pedra mine, which may become the world's second-biggest iron-ore mine by 2010.
A flurry of initial offerings in Brazil this year has helped bump up the value of the market. Close to 11.5 billion reais ($5.7 billion) have been raised in 20 IPOs so far this year, according to Bloomberg data. That's more than two-thirds of the 15.8 billion reais raised in all of 2006 in a record 26 IPOs. An additional 4.6 billion reais have been raised this year in additional share sales.
Real Estate
Of the 20 offerings this year, nine have been real estate developers, driven in part by speculation that falling interest rates will boost Brazil's housing market. Brazil's central bank cut its benchmark lending rate for a 15th straight time in April to a record low of 12.5 percent from a high of 19.75 percent in September 2005.
``Whenever interest rates are lower and declining --and they are in Brazil -- that's a good signal for corporate profit,'' Rochdale's Kaplan said. Kaplan estimates that company earnings in Brazil will increase 23 percent in the next 12 months, the biggest gain among the peer group of 40 countries she monitors.
Eleven of the 16 economists surveyed by Bloomberg expect the bank to reduce its benchmark rate another 0.5 percentage point, double the size of its last cut, when it next meets June 6.
Falling interest rates also have lifted bank profits as demand for loans increase and lower rates cuts debt defaults. Brazil's three biggest publicly traded banks reported, on average, first-quarter profit gains of 28 percent on increased lending.
Extension of Credit
``The growth in wages, with inflation under control, makes viable the extension of credit,'' Spinola said. As banks lower monthly payments due to extended repayment periods they can make loans to a larger portion of the population, Spinola said.
State-controlled Banco do Brasil SA, Latin America's biggest bank by assets, gained 27 percent this year. The bank's shares gained 2.7 percent May 15 when it announced a 50 percent jump in first-quarter income from continuing operations to 1.41 billion reais.
Banco Itau Holding Financeira SA, Brazil's biggest non-state bank, said May 8 that first-quarter profit rose 30 percent, sending shares 3.5 percent higher in two days.
Reduced Debt
The Brazilian currency's climb since the beginning of the year has also helped the government reduce its debt and led to ratings upgrades by the Standard & Poor's and Fitch ratings companies. Both raised Brazil's sovereign credit rating to one level below investment grade this month, spurring speculation that Brazil will be rated investment grade early in 2008.
Investment-grade ratings may lead investors to pay more for Brazilian stocks as perceptions of default risk fall. The average price-earnings ratio of Brazilian companies was 10.9 times earnings last year, up from 9.9 times in 2005.
Brazilian stocks this year have traded at an average price of 12.7 times earnings, according to Bloomberg data. That's less than the roughly 17 times estimated earnings for stocks on the Bolsa in Mexico and the 22 times estimated earnings for stocks on Chile's Ipsa index. Mexico and Chile are rated investment grade.
To contact the reporter on this story: Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net . Last Updated: June 4, 2007 17:17 EDT

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