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Brazil Funds Warn of More Pain as Stocks, Real Sink

By Alexander Ragir and Fabiola Moura
     Oct. 8 (Bloomberg) - Brazilian shares may extend their worst decline since 1999 into next year as the sell-off in commodities deepens, some of the nation's biggest investors said.
     While pension funds managing more than $90 billion in Brazil expect markets will rebound longer term, they see losses growing in coming months as investors pull money at a record rate from developing countries and demand weakens for oil and metals.
     "This turbulence will pass and we will return to normalcy during 2009,'' said Guilherme Lacerda, president of Funcef, the pension fund for Caixa Economica Federal workers that oversees the equivalent of $14.3 billion in Brasilia. "I don't know if it will be at the beginning, the middle, or the end of 2009.''
     The Bovespa stock index's 22 percent drop this month marks the steepest six-day tumble since January 1999, when the government devalued the real. The currency posted its biggest two-day slump in nine years this week, retreating 12.7 percent against the dollar, and the government canceled a domestic bond sale yesterday for the first time since March as yields rose.
     The Bovespa fell 3.9 percent today to 38,593.54 after dropping as much as 6.3 percent earlier. The real lost 0.9 percent to 2.33 per dollar, paring a 10 percent tumble after the central bank sold dollars in the spot market for the first time in more than five years.
      Investors withdrew a record $20.5 billion from emerging- market stock funds in the third quarter on concern the seizure of global credit markets may push developing economies into a recession, according to a report by EPFR Global of Cambridge, Massachusetts.
     Brazil and Russia, whose economies are dependent on commodities exports, led the MSCI Emerging Markets Index's 36 percent drop in the past three months to its lowest level since November 2005 as the price of oil, copper and sugar plunged.
Commodities Exports
     Commodities account for two-thirds of Brazilian exports, according to the Brazilian Exporters Association in Rio de Janeiro. Two of the nation's biggest exporters, Aracruz Celulose SA and Sadia SA, lost about half of their value since saying Sept. 26 that they made bad currency bets.
     "We sold most of our stocks in May and June and now we're just waiting,'' said Jorge Simino, who oversees $6.2 billion as investment director of pension fund Fundacao Cesp in Sao Paulo.
``For the market to find a trigger, it will take a while.''
      Brazilian pension funds oversee 451 billion reais in assets, including 84 billion reais in equities, according to Brazil's Association of Pension Funds, known as Abrapp. Brazilian stocks have a market value of $718.5 billion, according to data compiled by Bloomberg.
Miss Targets
     Petros, the nation's second-largest pension fund with about
$18 billion, said yesterday it may miss its performance target this year for the first time since 2003. Funcef will also likely miss its target, Lacerda said. Sergio Rosa, president of Previ, the country's biggest pension fund, said that his stock portfolio lost 10 billion reais since the collapse of the U.S. subprime- mortgage market.
     Markets may take more than a year to recover, said Fundacao Copel Chief Financial Officer Carlos Eduardo Felsky.
     ``We don't have a crystal ball, but we follow projections that indicate something between 12 to 18 months,'' Felsky, whose fund manages 4.6 billion reais, said in an e-mail response to questions.
     Brazilian President Luiz Inacio Lula da Silva urged consumers yesterday to keep spending and not be afraid of global credit-market losses. He authorized the central bank to buy loans from cash-strapped lenders and tap the nation's $200 billion reserves to help shield Latin America's biggest economy from the crisis.
Exaggerated Sell-Off
     Rosa said in an interview yesterday the sell-off has been ``hugely exaggerated.''
     "This is an opportunity to buy for anyone looking long- term,'' Rosa, whose firm manages $59 billion, said in an interview in Rio de Janeiro. "The overly optimistic outlook for global growth we saw before this crisis has turned overly pessimistic.''
     Brazil's economy grew 6.1 percent in the second quarter compared with 2.8 percent growth in the U.S. The declines in Brazilian stocks have pushed companies that trade on the Bovespa to an average 9.9 times profit, a third the price-to-earnings ratio on Jan. 2.
     The retreat follows five years of annualized 41 percent gains for Brazil's stock index as oil prices rose to a record
$147.27 and the Reuters Jefferies Commodities index climbed to an all-time high in July. Since the Bovespa's May 20 high, oil prices and the commodity gauge plunged more than 25 percent.
1999 Chaos
     The latest drop is far from the chaos that swept the country in 1999 when the government abandoned a currency peg after spending about $40 billion of reserves trying to defend it and the central bank raised the benchmark lending rate to 45 percent, triple where it is today. Still, the markets haven't bottomed, according to Wagner Pinheiro, president of Rio-based Petros.
     ``There's panic, the fundamentals are worsening and money is being spent covering losses,'' Pinheiro said in an interview.
``This trend will stick with us for a bit longer.''
--With reporting by Telma Marotto in Sao Paulo. Editors: Laura Zelenko, Chris Nagi

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