Bovespa Index Heads to Third Weekly Decline as Earnings Slump

The Bovespa stock index fell, adding to its third weekly decline, as first-quarter earnings slumped for Brazilian companies in the retail, financial and construction industries.

Retailer Cia. Brasileira de Distribuicao Grupo Pao de Acucar headed to the biggest drop in a month after net income fell 24 percent from a year earlier. Declining profits also dragged down exchange operator BM&FBovespa SA, utility Cia. de Saneamento Basico do Estado de Sao Paulo and homebuilder Cyrela Brazil Realty SA Empreendimentos e Participacoes.

“The market is in a moment of very little conviction and very little definition,” said Eduardo Favrin, who oversees about $3.2 billion as head of equities for HSBC Global Asset Management’s Brazil unit in Sao Paulo.

The Bovespa lost 0.8 percent to 63,476.55 at 10:35 a.m. New York time, heading to a 1.5 percent weekly drop. Fifty-five stocks declined on the index while 14 gained. The real weakened 0.7 percent to 1.6310 per dollar.

Earnings growth in Brazil is “too low” this quarter, Ben Laidler, New York-based head of Latin American strategy at JPMorgan Chase & Co., wrote in a May 12 report e-mailed to clients today.

Pao de Acucar, Brazil’s biggest retailer, lost 2.3 percent to 69.88 reais after a later Easter holiday period cut into sales. Net income declined to 132.4 million reais ($81 million) in the first quarter, the Sao Paulo-based company said in a regulatory filing.

Weak Trading Volumes

BM&FBovespa SA, the operator of Latin America’s biggest securities exchange, retreated 1.3 percent to 11.55 reais after profit fell 4.8 percent on weak equity trading volumes and lower fees for derivatives. Net income excluding minority interests slid to 270.8 million reais, the Sao Paulo-based company said in a regulatory filing.

Sabesp, as Brazil’s biggest water utility is known, declined 1 percent to 46.60 reais after saying net income fell 39 percent. Cyrela tumbled 3 percent to 15.66 reais after reporting a 57 percent drop in profit.

Investors are divided on whether Brazil’s inflation outlook is “benign” or whether the central bank is “behind the curve,” Pedro Martins Jr., an analyst at Bank of America Corp., wrote in a May 12 note to clients distributed by e-mail today.

Uncertainties

“Equity investors are taking a binary view on the inflation outlook for Brazil,” he wrote. “The room for Brazil central bank execution error is narrow and uncertainties on the inflation outlook remain wide open. Market indicators are assigning a low probability for the behind-the-curve scenario, in our view.”

The Bovespa dropped 7.7 percent this year through yesterday on concern accelerating inflation will hurt economic growth. The index trades at 10.3 times analysts’ earnings estimates, the lowest since March 2009, according to weekly data compiled by Bloomberg. That compares to a ratio of 13.3 for the Shanghai Composite Index, 7 for Russia’s Micex and 14.5 for India’s Sensex.

Investors pulled 3.3 billion reais from Latin America’s biggest equity market this year through May 4, data from the Sao Paulo exchange show.