Brazil: Softly, softly, the best approach – October 2009 IXE-Banif Market Analysis

The continued rally of the markets is both surprising and alarming. It assumes a recovery of the economy that the indicators do not confirm. Consequently, there is a fear of profit taking, and that this will be stronger than originally estimated. The uncertainty of when it will take place, if in October or only next year, is the dilemma facing investors.

Download: Brazil - Monthly allocation - October 2009
Market liquidity continues to be excessive. We believe that it is this large volume of resources and not the feeling that the worst is over, which is boosting markets. While the flow of resources into the real economy does not stop, a stronger profit taking becomes improbable. In Brazil, the government has started taking steps to reduce the flow. It has modified the bases for reserve requirements slightly and is gradually increasing the IPI to reduce the benefit from buying vehicles and white line goods.

In Brazil, from here onwards, the elections start to gain an increasing importance. October starts with the President of the Central Bank siding with the largest national party, PMDB. All he does not say is if he will be a candidate, leaving the Central Bank in March, or if he leaves, as will President Lula, only at the end of his mandate that goes to December 31, 2010.
We must not forget the pre-salt regulations currently under discussion at Congress. The tendency is for this to benefit the national market, which may or may not result in Brazil gaining more resources.

The dreamed for investment grade
The last classification agency approval needed to increase Brazil’s investment grade has finally done so: Moody’s has also classified Brazil at first-degree investment grade. This should bring resources to the Stock Market from foreign investors that can only invest in countries that have the seal given by the three main agencies. However, this should not happen in the short term, seeing as these new potential investors must study opportunities and compare them to others in the world.

Shares from the domestic economy should outperform
The certainty that at some point the Brazilian market should cash in the substantial profits gained this year causes us to suggest a continued conservative stance for our October portfolio. After all, the Ibovespa has gained 64% this year. We continue to prefer names linked to the development of the internal economy and good dividend payers. However, we have also kept our bets on the mining and steel industry due to potential gains, mainly from better sales volumes.

Outperforming the Ibovespa
Share – Catalyst/Fundamental
BRTP4 – highest upside potential in the sector
CPLE6 – Defensive in a month where we expect an increase in volatility
ITUB4 – 3Q09 result should show synergy gains
JBSS3 –demand/price recovery in the, private placement e M&A
LAME4 – Sales on ‘Children’s Day’ and during the Christmas period
LIGT3 – Discounted in relation to its peers
MMXM3 – Expectation Wuhun Iron Steel will confirm its offer
MRFG3 – demand/price recovery; M&A and distribution agreements
PCAR5 – Good representative of the internal market, operating in retail and food
TLPP4 – Announcement in October o a high dividend yield for the year 2009
USIM5 – 3Q09 result should report margin expansion
VALE5 – Increased sales of ore and pellets to the European market

Source: Banif-IXE, 01.10.2009