Ibovespa Falls From Four-Year High as Valuations Seen Expensive

(Bloomberg) -- The Ibovespa fell from its highest level in four years as disappointing economic data spurred concern that stocks are overvalued amid Brazil’s worst recession in a century.

Lenders Itau Unibanco Holding SA and Banco Bradesco SA were among the biggest contributors to the benchmark equity index’s decline. Companies that depend on revenue from abroad, including meatpackers Marfrig Global Foods SA and JBS SA, declined as the real appreciated for a third consecutive day.

The Ibovespa is trading at 14.3 times estimated earnings, its most expensive since May 2015, after it gained 83 percent in dollar terms this year on bets that President Michel Temer’s administration will succeed in trimming a budget deficit and restoring investors’ confidence. That valuation is seen by some analysts as excessive as economic data continue to show Brazil struggling to emerge from its slump. The national bureau of statistics reported Wednesday that the services sector contracted 3.9 percent in August from a year earlier, after having said Tuesday that retail sales fell 5.5 percent in the same period.

"The market is exaggerating," Joao Pedro Brugger, an economist at Leme Investimentos, said from Florianopolis, Brazil.

The Ibovespa fell 0.4 percent to 63,505.61 at the close of trading in Sao Paulo after rising as much as 0.5 percent earlier to its highest level since April 2012. Itau fell 1.6 percent and Bradesco dropped 0.7 percent. Marfrig declined 2.5 percent, and JBS lost 0.7 percent.

Homebuilder Gafisa SA climbed 6.2 percent to the highest since April after reporting a 21 percent increase in new projects in the third quarter. An MSCI index of real estate companies was the best performer among 11 industry groups as investors bet that the central bank would start reducing the highest borrowing costs in G-20 countries Wednesday --after markets closed, policy makers announced a rate cut for the first time in four years.

Lower interest rates could be a boon to the economy. Brazil’s central bank is scheduled to announce its decision on the benchmark Selic by the end of the day. All but two of 58 analysts surveyed by Bloomberg expect a cut in the rate, which is currently at 14.25 percent, of as much as 0.5 percentage point.

"We’re seeing that some investors who gained a lot in the past weeks are now taking a chance to pocket the profits," Ari Santos, equity trading manager at the brokerage H. Commcor, said from Sao Paulo. "But the expectation of better days in Brazil has taken over the market. This small drop doesn’t change the trend, which is still up."

State-controlled Petroleo Brasileiro SA extended a five-day gaining streak Wednesday as crude rose after the government reported that U.S. oil inventories unexpectedly fell last week and Saudi Arabia’s energy minister said many nations are willing to join OPEC output cuts.

--With assistance from Ney Hayashi To contact the reporters on this story: Denyse Godoy in Sao Paulo at dgodoy2@bloomberg.net, Marisa Castellani in Sao Paulo at mcastellani7@bloomberg.net. To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net, Sebastian Boyd, Jessica Brice