Paineiras Hedge Fund Buys Brazil Bonds on Economy

By Alexander RagirApril 1 (Bloomberg) -- Theodoro Messa’s Paineiras Hedge FIM hedge fund beat 96 percent of its peers this year on bets Brazilian bond yields will fall as the central banks slashes borrowing costs to shore up Latin America’s largest economy. Messa is buying bonds and avoiding stocks because the global recession will persist longer than investors expect, requiring Brazilian policy makers to deepen interest rate cuts, he said. He predicts zero economic growth for Brazil in 2009. “Growth is the problem around the world right now; it’s not inflation,” said Messa in an interview from Paineiras Investimentos’ office in Rio de Janeiro. “Market expectation for rates are too high across the board.” Messa’s $112.6 million Paineiras hedge fund increased 11 percent this year after jumping 20 percent in 2008. The Bovespa stock index slid a record 41 percent last year as commodity prices tumbled amid the worst financial crisis since the Great Depression. Brazil’s economy shrank 3.6 percent in the fourth quarter, the most in more than a decade, heightening speculation the central bank will cut lending rates to a record low to prevent a recession. Policy makers will reduce the benchmark rate to 9.25 percent by the end of the year from the current 11.25 percent, according to a central bank survey of Brazilian economists. Falling Interest Rates Real interest rates, or the difference between the central bank’s benchmark rate and inflation, are likely to fall below 5 percent in coming years from the almost 7 percent the bond market is pricing in now, said Messa, a partner at Paineiras. His hedge fund benefited at the end of last year as local- currency bond yields fell. The local-currency inflation-linked bond due in May 2015 yielded 6.93 percent today, down from 10.79 on Oct. 24. Bond yields move inversely to price. Paineiras was founded two years ago by Antonio de Padua Bittencourt and Ney Marinho, former partners of Banco Icatu SA, a Brazilian investment bank in the 1990s that was acquired by a company that is now part of Itau Unibanco Banco Multiplo SA. Brazil’s Bovespa index climbed 9 percent in the first quarter on speculation interest-rate cuts will spur economic growth and government stimulus packages from China to the U.S. will bolster demand for commodities. ‘Opportunity’ for Stocks “Bond yields fell violently and while I think they have a bit more to fall, I don’t think they’re as attractive” as stocks, said Carlos Eduardo Ramos, who oversees the equivalent of $2.2 billion as chief investment officer of BNY Mellon Arx in Rio de Janeiro. “Within fear lies opportunity. In moments of crisis like this it’s good to look for good, cheap companies.” The Bovespa index dropped to 9.76 times estimated earnings, almost half the 17.05 price-earnings ratio it fetched on May 20, when the gauge touched a record high. Brazil’s economy will expand 1.2 percent this year, compared with a previous forecast of 3.2 percent, policy makers said this week in their quarterly inflation report. Economists polled by Bloomberg predict 0.8 percent growth, according to the median of 15 estimates. Messa said the outlook for stocks is “very uncertain” as the economy slows. “The world, and Brazil, will take quite a while to recover,” said Messa. ”Nothing is certain, but rates falling a lot more is just the most probable scenario.”