FiNETIK – Asia and Latin America – Market News Network

Focus on Greece

In May, problems in Greece are likely to call everyone’s attention to negatives. The market has been testing the country’s fundamentals to an extent that has caused, among other things, a sharp increase in the cost of money and a downturn in risk rating. With this deteriorating situation, the debt rollover, which we previously thought to be the main problem, has moved down in the scale of importance. However, on May 19, a significant share of the Greek debt portfolio will fall due and need rolling over. Therefore, the financial market will focus on this particular event in the first weeks of the month. At this point, however, other more serious factors pertaining to the Greek situation are at stake, including its commitment and capacity to reduce fiscal debt, its ability to pay/rollover LT debt over the next two years and its continued membership of the Euro community. Adding to the Greek problem, other countries in the Euro zone with similar, although less acute, debt problems are also suffering from growing tension in the international credit market. At the end of April, for instance, S&P downgraded both Portugal and Spain’s credit ratings, following Fitch’s downgrade of Portugal in the previous month.

Brazil – Monthly Allocation – May 2010

Fortunately, there are positive factors to consider

While the Greek problems remain the main negative factors to consider, all other main drivers fall on the positive side. Locally, economic activity continues strong and we recently increased our GDP growth estimate to 7%, with growth currently running at the 8% level. The recently approved 0.75% increase in the Selic basic interest rate is the beginning of the Central Bank’s effort to curb rising inflation, the unwanted side of economic growth. Abroad, the Chinese economy overheats, with GDP growth running at around 12%, while our expectation for 2010 is 11.5%. In the USA, we note the first signs of recovery in the labor market, with the unemployment rate apparently coming out of the trough. Even in Europe (Euro zone), the eye of the current storm, economic activity and business confidence are recovering, although this is based more on exports, as local demand remains weak.

Optimism likely to bounce back and forth

Because of the influence of these opposite drivers throughout the month, we expect significant volatility for the equity market. We feel that the general trend might be flat to slightly negative during May, as we do not foresee an easy or fast solution for the Greek issue. Our suggested portfolio for May reflects this view with an increase in the number of defensive names and a somewhat expanded number of shares. We included three new names (Tegma, Hering and Tiete), reduced the weight of one share (CSN from 10% to 5%) and withdrew two names (Eletropaulo and MMX). Despite these changes, we maintained the core of our portfolio, with 80% of its total weight untouched.

Source: Banif-IXE, 03.05.2010

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