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Brazil bears shift to Mexico

Brazil bears shift to Mexico

Posted by Juan Gavasa on December 16, 2014

With the exchange-traded fund that tracks Brazilian stocks back to 2009 lows, bears are betting the rout is waning and turning their sights to Mexico. The reason? Oil.

In Mexico, a crude-exporting nation where the benchmark index fell 16 percent in the past six months, stocks are being targeted by short sellers on speculation that oil’s drop to a five-year low will weaken the peso and curb energy investment that the government had been counting on to spur growth. Brazil, a net importer of crude, has seen wagers on a decline in the Ibovespa gauge recede after the index lost about a third of its value in dollar terms since June 13.

“Brazil isn’t overly affected by the plunge in oil prices, as compared to some other countries, like Mexico,” Geoffrey Pazzanese, a senior portfolio manager at Federated Investors Inc., which oversees $352 billion, said by telephone from New York. “If you’ve been short and made your money, maybe it’s a good time to take profits and move on to the next idea. Maybe it’s just played out in the short term.”

Wagers on a decline of the iShares MSCI Brazil Capped ETF decreased to 8 percent of shares outstanding as of last week from 14 percent on Nov. 28, according to data compiled by London-based Markit and Bloomberg. Bearish wagers on the iShares MSCI Mexico Capped ETF jumped to 9.8 percent from 5.7 percent in the span.

The ETF tracking Brazilian shares sank 3.7 percent to a five-year low of $34.35 yesterday, bringing this year’s decline to 23 percent. Brazilian shares have slumped as economic growth slowed and prosecutors widen an investigation into corruption allegations at state-run Petroleo Brasileiro SA. The Ibovespa dropped 1.9 percent at 12:37 p.m. in Sao Paulo.

Petrobras has plunged 30 percent in the past month as authorities expand investigations into executives at construction companies that allegedly formed a cartel to win contracts, including 59 billion reais ($22.2 billion) of work from the state-controlled oil producer. The drop helped drag the Ibovespa’s valuation to 9.75 times estimated earnings, the lowest since March 26, data compiled by Bloomberg showed.

While the Ibovespa could post a “relief rally,” Federated is still cautious on the outlook for Brazilian stocks given prospects for corporate earnings, according to Pazzanese.

The plunge in crude oil below $56 a barrel has damped optimism that Mexico’s push to open its energy industry to private drillers will lure investment and spur growth. The peso is the second-worst performing major currency in the past month, slipping 8.1 percent. The ETF tracking Mexican shares fell 0.7 percent yesterday, capping 15 days of the declines in the longest rout since its inception in 1996. It closed at $56.03, with year-to-date losses at 18 percent.

Mexico’s stocks are also falling on concern related to the unexpected cancellation of a $4.3 billion high-speed railroad contract and the political turmoil created by the disappearance of 43 college students suspected to have been slaughtered by criminal gangs, according to ING Groep NV.

Since the rail contract was scrapped, the first lady and finance minister have said they acquired homes from companies belonging to the owner of a business in the group that originally won the award, spurring concerns over conflicts of interest, which the minister and a president’s spokesman have denied separately.

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