June 14, 2013 3:26 pm

BM&FBovespa: fair exchange

Brazil’s stock market may be in bear territory, but its diversified, integrated bourse is faring better

Brazil has played a shocker of a game this year. The stock market entered bear territory this week, with the benchmark Ibovespa index marking a 20 per cent drop from its 2013 high. The country, once a global star, was already hitting too many off target – battling a combination of falling growth and rising inflation – when concerns about the end of the US Federal Reserve’s quantitative easing programme prompted mass selling of emerging market investments.

But never mind all that. BM&FBovespa, the exchange, which was formed by the 2008 merger of the main stock and futures exchanges and touts a market capitalisation of nearly $12bn has been steady at the back. While Brazil has stumbled, trading volumes have not. Uncertainty leads to heightened equity volatility and a greater need for interest rate and currency hedging, which takes place on the futures exchange. Those who want to trade Brazil pretty much have to use BM&FBovespa. To protect its monopoly and keep up with the times, the exchange has embarked on a R$1.2bn ($600m) three-year technology investment programme. That includes an electronic trading system for equities. It will soon test a system to unify its four clearing houses, starting with derivatives.

At R$13, the shares have fallen 8 per cent in the year to date. That beats the Ibovespa, which is down 17 per cent. And BM&FBovespa’s shares are still up 31 per cent since the beginning of 2012, during which time the Ibovespa is down 11 per cent. Amid the negativity that has formed around Brazil, BM&FBovespa trades at 16 times forward earnings, a discount to other diversified, integrated exchanges such as Singapore Exchange, Hong Kong Exchanges and Clearing, Bursa Malaysia and Australia’s ASX.

The question for investors is whether BM&FBovespa will be able to keep rolling out new products and increasing trading and clearing fees if the Brazilian economy continues to lose momentum. Initial public offerings have dwindled, foreign banks have balked at expanding and even local investors are fleeing to savings accounts after the central bank raised interest rates to fight inflation. The problem with any exchange is that it does not control the market.

As the friendly match with England at the new Maracanã stadium last week showed, even when it comes to football, Brazil is no longer a sure bet.

Email the Lex team in confidence at lex@ft.com

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