SAO PAOLO (BLOOMBERG) - The start of 2016 has been grim for investors in Brazil.
Three weeks into January, the benchmark stock index is already down 15 per cent in dollar terms, underperforming its emerging-market peers and the Standard & Poor's 500 Index, just as it has every year since 2010. While expectations for a rebound in Brazil weren't high, with political instability and the worst recession in a century, the Ibovespa's worst start to a year in data that goes back almost two decades has decimated any bullish hopes.
"This is going to be a very tough year," said Fausto Gouveia, a director at Sao Paulo-based AZ Legan, which manages 1 billion reais (S$349.92 million) in assets. "Brazil is already facing gigantic domestic challenges, and to add insult to injury, now there's also all the uncertainty abroad, with China's slowdown affecting metal prices and oil slumping."
The benchmark Ibovespa gauge has fallen to the lowest level since 2005, pushing price-to-book valuations to below 1 - which means investors think Brazilian stocks are now worth less than their net assets.
While the 2016 plunge isn't exclusive to Brazil, the drop has pushed the Ibovespa to the biggest discount to the MSCI World index in a decade.
Between domestic and external crises, there's been almost nowhere to hide in stocks. All 10 industry groups are posting losses, with just four of the Ibovespa's 61 members gaining. Companies that rely on domestic demand have dropped amid the recession and the fastest inflation in 12 years. And even those losses can't compare to the tumble brought on by the slump in commodity prices, which has sent material shares plunging 26 per cent.
Petroleo Brasileiro or Petrobras, the state-controlled oil company, has contributed the most to the Ibovespa's tumble this year and it's also the worst performing stock on the MSCI Emerging Markets/Energy gauge. The shares have already lost a third of their value in 2016, adding to six straight years of losses.
Petrobras's market value has plummeted 90 per cent since its peak in 2008, and the stock is now trading at 4.41 reais - approaching US$1 as the real weakens further after posting the biggest losses among major currencies last year.
With the real trading near record lows, concern is mounting that companies with dollar-denominated debt will struggle to keep up with their payments. Gol Linhas Aereas Inteligentes SA, an airline that gets 88 per cent of its revenue in Brazil and has 87 perc ent of its debt linked to foreign currencies, lost 83 per cent of its market value last year and another 54 per cent this year. Average yields on Brazil's corporate bonds are approaching 12 per cent, levels not seen since the depths of the 2008 financial crisis.
The nation's stocks, which just a few years ago accounted for over 3 per cent of the global market capitalization, now make up just 0.7 per cent of global equity values.