July 5 (Bloomberg) -- Brazil's stock market, the largest in Latin America, had its first outflow of foreign capital in June in more than a year as investors anticipated higher U.S. interest rates would damp demand for Brazilian equities.
The Sao Paulo stock exchange reported 572 million reais ($189 million) of foreign capital moved out of the market in June as international investors bought 5.723 million reais in shares and sold 6.295 million reais worth, according to its Web site. The Bovespa hasn't had an outflow since May 2003.
Investors such as Urban Larson at Baring Asset Management cut back holdings in Brazil before the U.S. Federal Reserve on June 30 raised its benchmark lending rate to 1.25 percent from 1 percent. Brazil's benchmark Bovespa stock index, the world's second-best performer last year after China, has dropped about 7 percent in dollar terms this year.
``We reduced our assets in Brazil gradually over the last few months as we expected the market to underperform in a tightening cycle of rates in the U.S.,'' said Larson, who helps manage about $250 million in Latin American equities at Baring Asset Management in Boston. Brazil's stock market has a value of $212 billion compared with $160 billion for Mexico's, according to Bloomberg data. Brazil is among developing nations that rely on funding from international bondholders and may have to pay higher borrowing rates because of rising rates in the U.S., the Bank for International Settlements said in June.
Brazil's Debt Brazil has $400 billion of government debt, more than any other developing nation.
Net Servicos de Comunicacao SA, the country's largest cable television operator, was the worst performer on the Sao Paulo stock exchange last month, falling 17 percent. The Sao Paulo-based company, which has made only one quarterly profit in more than nine years, is in talks with creditors after defaulting on $870 million of bonds in December 2002.
Telefonos de Mexico SA, Mexico's largest fixed-line telephone company, said on June 28 it may buy as much as 60 percent of Net Servicos. As part of the transaction, Net Servicos would sell as many as 1.83 billion new voting and non- voting shares.
The Bovespa index rose 12 percent in dollar terms in June, after falling the previous two months, as government data showed the economy pulling out of last year's recession. Bank lending increased by the most in at least 18 months in May and Brazil's unemployment rate fell from a three-year high. The nation's trade surplus surged to a record $3.8 billion in June.
Growth Forecast
The government forecasts the economy will expand 3.5 percent this year. ``If you look at Brazil in isolation it looks great,'' Larson said. ``If you look in the global context there are more causes for concern.''
The Bovespa index today rose 0.5 percent to 21,670.29.
The pullout from Brazil's stock market may have been overdone ahead of the Fed's decision on rates said Adriano Fontes, who helps manage about 1.2 billion reais of stocks and bonds at Arx Capital Management in Rio de Janeiro.
``There was more defensive behavior from investors at the beginning of the month with doubts on what the Fed would do,'' Fontes said. ``But the good mood came back with the improving economic numbers.''
Brazilian companies also are beginning to tap equity markets for financing, with the first initial public offerings in more than two years. On May 26, Natura Cosmeticos SA, Brazil's biggest cosmetics company, started trading at the exchange in the first IPO in Brazil since Cia. De Concessoes Rodoviarias, a Brazilian toll road operator, listed shares in February 2002.
Gol Linhas Aereas Inteligentes SA, Brazil's third-largest airline, and America Latina Logistica, Latin America's largest railroad operator, both started trading in June.
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