(Bloomberg) — The rally that drove Petrobras shares to the highest in more than a decade risks fizzling out as support for President Jair Bolsonaro appears to be stalling in voter polls just days before a runoff vote.
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Stocks that stand to gain from a new Bolsonaro term had been leading the monthly advance in the benchmark Ibovespa index since the president’s better-than-expected showing in a first-round vote on Oct. 2. Petroleo Brasileiro SA, as the state-controlled oil producer is formally known, was up more than 26% this month as of Friday.
Petrobras has since fallen 11% in the past two days, wiping out nearly all of last week’s gains. The stock closed at the highest since 2009 last Friday, a surge that pushed its market value past $100 billion. But that came to a screeching halt after an ally of Bolsonaro’s resisted arrest and lobbed grenades at police on Sunday. The confrontation spooked investors, who are concerned it will hurt the incumbent’s chances of winning another term.
Leftist front-runner Luiz Inacio Lula da Silva would take 54% of valid votes, which exclude null and blank ballots, compared with 46% for the incumbent, according to an Ipec poll published Monday. Both stand exactly where they were a week ago, the survey shows.
Shares seen as potential winners from a Lula presidency are rallying in Sao Paulo Tuesday. Education stocks, including Cogna Educacao and Yduqs Participacoes SA, were up at least 5% at 2:43 p.m. local time, while retailer Magazine Luiza SA was the best-performing company in the Ibovespa, up 7.6%.
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“We believe volatility will persist and see little reason to increase exposure” to Petrobras, Banco BTG Pactual SA analysts Pedro Soares and Thiago Duarte wrote in a note dated Oct. 24. “We thus recommend increased caution.”
Bolsonaro and Lula have opposing views on the role of the state in the economy. While the incumbent has ordered studies to sell the oil giant, his challenger opposes such a move, planning instead to increase the company’s spending on less profitable divisions like refining.
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Although Bolsonaro unnerved Petrobras’s investors by pressuring it to contain fuel prices — and firing three of its chief executive officers for failing to do so — the firm has enjoyed growing production, record profits and massive dividends on his watch.
Despite the electoral uncertainty, some stock pickers piled into Petrobras on bets that the stock’s depressed multiples were pricing in a negative scenario too heavily. Petrobras currently trades at 2.2 times enterprise-value-to-forward-Ebitda, well below the 5.5 multiple for Chevron Corp. and the 5.3 multiple for Exxon Mobil Corp., Bloomberg data show.
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Asset manager Polo Capital recently built a position in Petrobras, betting that bylaws designed to curb government intervention provide protection. It also owns shares in state-owned lender Banco do Brasil SA.
If Bolsonaro loses more steam by Sunday, Mantaro Capital’s portfolio manager Leonardo Rufino says he might consider trimming bets on Petrobras and Banco do Brasil, without fully scrapping them as both “remain quite cheap.”
–With assistance from Barbara Nascimento.
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