Citi Warning on Brazil

by Chris Sturr | February 20, 2009

From Bloomberg, courtesy of Marxmail. Stocks in New York opened sharply lower, following losses worldwide. Could be a rough day on Wall Street.

Brazil Stocks May ‘Capitulate’ on Economy, Citi Says (Update4)

By Roger Neill and Michael Patterson

Feb. 18 (Bloomberg) Brazil stocks may drop in the “next few weeks” because valuations climbed too high given the outlook for a “very sharp” recession in Latin America’s biggest economy, according to Citigroup Inc.

Brazilian shares trade for about 9.5 times estimated profits, above the long-term average price-to-earnings of 9, after the market rallied more than its developing-country peers since November, Citigroup strategist Geoffrey Dennis wrote in a research note dated yesterday. The benchmark Bovespa index has climbed 5.7 percent this year, the second-best performance after China among the world’s 20 biggest equity markets.

Brazil stocks will “capitulate” as the economy contracts and the U.S. recession lasts through the third quarter, Dennis wrote. Investors should wait for the Bovespa to drop below 35,000 before they buy Brazilian stocks, he wrote. The Bovespa lost 4.8percent yesterday, the steepest retreat in a month, to 39,846.97.

“The market’s sharp fall on Tuesday is likely to be followed by further losses over the next few weeks,” wrote Dennis, Citigroup’s New York-based head of Latin America equity strategy. Shares are “likely to capitulate to this barrage of economic weakness at home and abroad,” he wrote.

‘Defensive’ Stocks

Dennis reduced his rating on Brazilian stocks to “neutral” from “overweight,” saying the downgrade is a “trading call.” He maintained his year-end target for the Bovespa at 55,000 and kept his “bullish long-term view.”

Within Brazil, investors should buy shares of “defensive” companies including utilities, phone companies and makers of consumer staples, while reducing holdings of raw-material producers and financial companies, Dennis wrote.

The Bovespa today slipped 0.4 percent to 39,674.39. Mobile- phone carrier Tim Participacoes SA, picked by Citigroup as a preferred defensive stock, increased 6.1 percent to 6.95 reais.

Dennis increased his rating on Colombian stocks to “overweight” from “neutral,” citing the market’s “defensive” characteristics. Colombia’s benchmark IGBC Index has climbed 2.5 percent this year.

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