April 29, 2008 / 10:03 PM / in 11 years

Hedge funds see Brazil vulnerable to commodity drop

SAO PAULO, April 29 (Reuters) - Concerns over a slump in commodity prices may weigh on Brazil’s benchmark stock index and currency in the near term, hedge fund managers said on Tuesday.

Brazil may be able to weather a recession in the United States since local demand has been the main driver of the economy’s recent expansion.

But Brazil's markets are vulnerable to a downturn in commodity prices caused by a U.S. slowdown as the country's Bovespa index .BVSP is heavily weighted in metals, oil and steel companies.

“There isn’t a direct effect of the U.S. crisis, but the risk is commodity prices since a big part of the Bovespa index is commodities,” Enio Shinohara, a partner at Claritas Investments, a Brazilian hedge fund with about $1.1 billion in assets, said at a seminar.

Brazil has been partially insulated from the crisis in the U.S. economy and in credit markets because prices of iron ore, oil, soybeans and other agricultural commodities have surged to record highs.

The Bovespa index, which soared 43 percent last year, has edged down 0.1 percent so far in 2008, contrasting with a slump in emerging market countries such as China and India as well as major markets in the United States and Europe.

The high commodity prices helped increase the inflows of dollars from exports and fueled investors’ appetite for companies such as iron ore and metals miner Vale VALE5.SA and oil giant Petrobras (PETR4.SA).

But analysts said the surge in commodity prices may have been overdone, raising concerns that a decline in prices will have a direct impact on the Bovespa index.

“We have concerns about commodities for sure,” said Christopher Edwards, managing director of Fabien Pictet & Partners Ltd, a London-based hedge fund with $700 million in emerging market assets. “You can’t have ever increasing demand and ever increasing prices.”

Edwards said he has sold short shares of Petrobras and Vale, betting on a drop in commodity prices.

Brazil's currency, the real BRBY BRL=, has gained 4.2 percent after surging more than 20 percent in 2007 -- partly owing to dollar inflows from commodity exports -- and may also be vulnerable to the commodity drop.

“Our currency is being perceived as a commodity currency. As commodities have gained this year, the currency has appreciated,” said Luiz Fernando Figueiredo, partner of hedge fund company Maua Investimentos and a former Brazilian central bank director of monetary policy.

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