(Bloomberg) -- The biggest rally in two years for Brazil’s Ibovespa benchmark signals to long-time bear Michael Shaoul from Marketfield Asset Management LLC that stocks might have bottomed out.

State-run Petroleo Brasileiro SA, the world’s biggest crude producer in ultra-deep waters, has gained 26% since reaching a nine-year low on March 17, and the Ibovespa rebounded 12% since March 14, when its members traded at the cheapest valuations in two years. U.S. ETFs that invest in Brazil had their second week of net inflows last week, the longest positive streak since August, according to data compiled by Bloomberg.

Shaoul, whose MainStay Marketfield Fund more than doubled in size to $21 billion since last June and outperformed 96% of its peers since betting against Brazilian equities in mid-2011, is now reversing strategy. Valuations after the Ibovespa sank into a bear market last month already reflect the weaknesses in Latin America’s largest economy, he said.

“The bad news is largely priced in to this market,” Shaoul, chief executive officer at Marketfield, said in a telephone interview from New York. “There are other emerging markets with much worse problems than Brazil which have done much better over the last three years. Three years might be long enough to get everybody on the other side of the boat.”

The Ibovespa has tumbled 31% from a record high in 2008 after an increase in public spending and lower interest rates failed to bolster economic growth while sending inflation above the central bank’s target range. That combination prompted Standard & Poor’s to cut the country’s credit rating for the first time in a decade last week.


Brazil’s main stock gauge trades at 9.86 times estimated earnings, according to data compiled by Bloomberg, up from 8.86 on March 14. That compares with a multiple of 10 for the MSCI Emerging Market Index, and 17.85 times for Mexico’s benchmark IPC index.

U.S.-based exchange traded funds that invest in Brazil posted the first back-to-back weekly inflows since August, according to data compiled by Bloomberg. Investors poured a net $44 million into Brazil-focused ETFs the week through March 28, following net inflows of $15.5 million in the previous week, the data show.

While Brazil benefited from more positive flows into broad emerging-market equities, the rally in the nation’s stocks has been largely led by state-owned companies, which rebounded after a poll showed President Dilma Rousseff losing support ahead of the October election.


Investors are betting Rousseff doesn’t have the political will to pass reforms needed to strengthen Brazil’s economy, which is why the market has reacted positively to signs she may not win a second term, said Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil SA in Sao Paulo.

Approval of Rousseff’s way of governing fell to 51% in March from 56% in December, an Ibope poll published by the National Industry Confederation showed last week. Her government’s approval rating slipped to 36% from 43% in the same period, according to the survey of 2,002 Brazilians conducted from March 14 to March 17. The poll has a margin of error of two percentage points.


Voting shares of state-run utility Centrais Eletricas Brasileiras SA have rallied 35% since the Ibovespa entered a bear market on March 14, the best performer on the gauge. Lender Banco do Brasil SA has climbed 21% in the span, leading advances among financial shares.

Given that the Ibovespa’s rally has been driven by speculation about the elections outcome, gains may not last, said Geoffrey Dennis, the head of global emerging-markets strategy at UBS AG. He points out that although Rousseff’s approval rating has dropped, she’s still leading in the polls.

“We’ve been underweight in Brazil and that went really, really well until just a few days ago,” Dennis said by phone from Boston. “We would be reluctant to chase this market at this point of time. We don’t think it’s necessarily going to go that much further.”

While the rally in Petrobras, the heaviest-weighted stock on the Ibovespa, accounted for most of the index’s recent jump, gains in the equity market will probably go beyond state-owned companies as years of underperformance pushed many other stocks to attractive levels, Shaoul said.

“It’s been an impressive rally,” he said. “The stuff that has done best is generally the stuff that people hated the most.”

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