Strong domestic economy
The debate in developed nations is about the health of their public finance and how this will affect growth in the future. In Brazil the concern is the same, but it is at a different stage. While in some developed countries the debt is at its record high and government deficits are reaching worrying levels, in Brazil public accounts indicate deterioration, but for now they are only clouds in the horizon in a scenario of blue skies for this year and the next. The Brazilian economy is overheated especially in some sectors, and given the low level of past investment, inflation has become an issue (to be resolved in the coming months). In this scenario of a fragile world economic recovery, Brazil and China are clearly trying to avoid bubbles as past stimulus measures were successful. We remain bullish about equities in Brazil, particularly domestic plays, despite knowing that the government will take measures to slow the economic growth. With this in mind we foresee Brazilian stocks moving higher, but not without some volatility.
Ibovespa is a bad indicator
Although we set Ibovespa as the benchmark for this suggested Allocation, we acknowledge it may not be the most adequate index to reflect the Brazilian stock market at the moment. Heavyweight Petrobras has been underperforming the Ibovespa since the government announced the intention to make a capital injection last year. It could reach as much as US$50bn and depending on terms dilutive to minority shareholders. We might be close to have this uncertainty ended and Petrobras could finally trade again based on its fundamentals. Vale, another heavyweight, has also dragged the Ibovespa down this year. Despite an expected increase in prices of iron ore, we feel investors are somewhat skeptical that the world recovery is sustainable and therefore volumes could suffer in the medium term. We already heard of investors willing to swap Vale for Petrobras, but this might only start next month.
Interest rate: no changes in Brazil, US or Europe
COPOM in Brazil will take place on March 17, while the FOMC in US on the 16th and the ECB on the 04th. We believe the market is already factoring in a small interest rate hike in the next COPOM meeting. However, we do not expect any of them (ECB, FOMC or COPOM) to change interest rates in March. Inflation has been high lately in Brazil and at this pace it would lead to a level above the Central Bank’s target for the year (4.5% for 2010). Although the government will do anything at hand to delay an upward trend in interest rate, as recently raised the compulsory rate for bank deposits, we believe it cannot avoid raising the SELIC rate to two digits until YE, from the current 8.75%.
Read full report Brazil – Allocation – March 2010
Source: IXE, Banif, 01.03.2010
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