By Guillermo Parra-Bernal and Asher Levine
SAO PAULO, Sept 12 SAO PAULO, Sept 12 (Reuters)
- Brazilian financial exchange BM&FBovespa SA decided
to change the methodology of its benchmark Ibovespa stock index
to reflect the new reality of the country's economy and not
because of a slump in the stock price of Grupo EBX-controlled
companies, Chief Executive Edemir Pinto said on Thursday.
The changes, the first to the Ibovespa index since
its inception in 1968, will give more weight to a share's free
float than its average daily trading volume, boosting the
presence of large companies in the gauge and excluding companies
whose shares introduce significant short- and medium-term
distortions in the market. Pinto said the changes had been
considered for a long time.
The decision underscores the growing pressure from
international and local investors for a stock market gauge that
better mirrors the new realities of Brazil's economy. During the
past decade, more than 40 million people joined the middle
class, driving a hefty expansion in services and helping
re-balance the influence of commodity and industrial companies.
Pinto rebuffed the notion that a tumble in shares of
cash-strapped oil producer OGX Petróleo e Gas Participações SA
, which shed 91 percent of their value this year,
motivated the decision. OGX, which has been one of the Bovespa's
five-biggest stocks since late 2011, is currently trading below
1 real and is partly to blame for the index's poor run this
"The changes had been considered for quite a long time, they
didn't come up because of short-term situations," Pinto said at
an event to present the new methodology in São Paulo, adding
that the steps were aimed at better reflecting the new reality
of Brazil, the second-largest emerging market economy.
Strategists said the changes will favor companies with large
market capitalization in the electricity, education, mining,
banking and consumer goods sectors. Airlines, real estate
developers, power holding companies and steelmakers could lose
room in the index under the changes, which take full effect next
May after being phased in through the first four months of 2014.
Local and foreign investors have for years urged for
modifications to the index's formula, pointing to the
comparatively heavy weighting of commodities exporters, which
have underperformed stocks linked to domestic consumption over
the past two years. The calls for change grew much louder in
recent months after the weighting of OGX, controlled by
embattled tycoon Eike Batista, led to steep drops in the index.
The index, which traded slightly higher on Thursday morning,
is down 12 percent this year.
Moving to free-float weighting "is positive and should
correct most of the distortions," said Felipe Hirai, head of
Brazil equity strategy with Bank of America Merrill Lynch.
STOCK BORROWING CAPS
OGX closed on Wednesday's session at 0.38 reais, just
one-fourth the value of the second-lowest priced stock on the
index. But because the Bovespa's weighting is based primarily on
the total number of trades in a stock, OGX's share of the index
rose in the most recent rebalancing, meaning even small changes
in the stock's price contribute to wide swings the broader
A decision by BM&FBovespa to fine-tune criteria for stock
borrowing - the basis for short-selling shares in the exchange -
and which affected limits for short interest in OGX aimed at
"lowering potential capital and market inefficiencies," said
Cicero Vieira Neto, BM&FBovespa's senior vice president for
operations, clearing and depositary services.
Capital markets in Brazil will better assess the risk of
pre-operational companies such as OGX before buying shares in
those type of companies, Pinto added. Most of Batista's Grupo
EBX-listed companies did not generate revenue at the time of
their initial public offerings a few years ago, and many still
In fact, OGX and some of its sister companies bear copious
amounts of debt and are engaged in ambitious capital spending
plans. "The lesson is that - investors will learn to better read
the risk embedded in start-up companies," Pinto noted.
Under terms of the changes, weighting criteria will be based
on free-float, or the amount of shares trading in the market,
with a two-times cap on liquidity. Trading volumes, not number
of trades, will be the main driver for the Bovespa's so-called
negotiability index - a key compenent of the index - under the
Stocks ranked within the top 85 percent in terms of
negotiability index, or that traded in at least 95 percent of
the trading days in the three previous index rebalancings, could
be included in the Ibovespa. Shares with prices below 1 real,
known as penny stocks, and stocks that enter into special
situations such as bankruptcy proceedings, could be removed from