Although subject to volatility, we are more positive about the stock market in January 2010, compared with last month. The news flow will definitely be positive throughout the year, given the easy comparison with 2009 (GDP in 2010 should grow between 5 to 6% YoY). Moreover, it is an election year in Brazil, which normally means more government spending and higher economic activity.
In addition, investments in infra-structure should grow to support events such as World Cup (2014) and Olympic Games (2016), not including the oil industry that is boosting capex in the presalt fields and spending more on gas. Last but not least, we believe the country will continue to attract capital from foreigners and locals, such as pension funds, which should also divert more resources to equities – riskier assets in general – in search for higher returns, as the fixed income (interest rate) should not be enough to meet their actuarial required returns. In summary, before the samba (Carnival) in February, we believe the positive flow and expectation of improvement should drive the market. Read the full Market Report Brazil – January 2010
Elections + low interest rate + growth = more flow
Elections for president, state governors and Congress will take place in October 2010. On one hand, this means more spending, higher economic activity and ensuing more company profits. On the other hand, we believe this could mean stress to investors from mid-year onward, as the presidential candidate Jose Serra (from the opposition) may change the current economic policies and uncertainties mean more risk. Even to a smaller degree than in other LatAm/EM countries. Moreover, nothing of significant importance in Congress will be approved from 2Q10 on. Thus, with current visibility, investors should be cautiously optimistic.
Interest rates should move up in 2010 and there is little doubt that it will happen. The debate is about intensity and timing. In any scenario, it should remain low compared with historical levels and continue to stimulate local investors to take more risks (i.e. equities). Bear in mind that most debts in Brazil are based on fixed rates and a more restrictive monetary policy does not mean less available income in the short term.
We believe the news flow will be positive in most economies and the easy comparison should be a good support for equities. Brazil is and should continue to be a hot spot for investments, given the size of the domestic market and events to take place in 2014 (FIFA’s World Cup).
Risk aversion could continue
In the past days of the year, risk aversion increased at global level, triggered by Dubai’s debt negotiation. Later on, several countries had their credit ratings downgraded. The euro lost ground against the dollar, as well as EM currencies. It is an adjustment of expectations regarding fiscal imbalances and a higher focus on risk management. We would not be surprised if this movement continues. We are cautiously optimistic looking ahead.
Source: IXE Banif, 04.01.2010
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