Brazil off the boil

What a bunch of wimps. In the old days, emerging market investors were fearless, rugged types. Now it seems a mere 8 per cent correction in the Brazilian stock market since this year’s high is enough to scare them off. The pricing of Thursday’s initial public offering of oil services and shipbuilding company OSX Brazil is to be slashed, while shares issued in what would have been the world’s largest IPO this year will be almost halved. All four Brazilian listings in 2010 have been weaker than hoped.

What is going on? After all, this is a market even five year olds can broke to clients. Brazil’s economy will grow as fast as 6 per cent this year after a small blip in 2009. Exports are rebounding, as are corporate earnings which means valuations, if frothy, are tolerable. The football World Cup could buoy animal spirits, and if not hosting the 2016 Olympics will. Also nothing radical is expected from a new President in November.

Nonetheless, three reasons for investor nervousness remain. First is the pace of the equity rebound since November 2008. In just over a year the Bovespa index has more than doubled to within 5 per cent of its all time high. A pause for breath, therefore, is understandable. Second, domestic investors like to compare dividend and bond yields. Elevated share prices and expectations rates will rise soon make stocks relatively unattractive.

Third, the commodity party may be winding down. Foreigners in particular own Brazil as a reflation play on global liquidity. But while exports are only 15 per cent of national output, the energy and materials sectors account for 43 per cent of the local index. That’s some bet. Brazil the country is maturing, but its market is still no place for the faint hearted.