Mexico: 2nd Stage of Economic Recovery Expected – May 2010- IXE-BANIF Monthly Analysis

Recovery currently driven by factors from abroad but local factors might drive further improvements

The Mexican economy continues to recover, driven mainly by industrial and export activities. These sectors benefited from the increased demand from the USA caused by economic recovery.

Mexico - Monthly Allocation - May 2010

Increased exports occurred despite the 5.9% appreciation of the Mexican Peso against the US dollar, to P$12.3/US$. Our expectation is of a continuation to this trend, at least until the end of this year, at which time we forecast a P$12/US$ FX rate: a further 2.5% appreciation.

Local economic activity, when separated from the benefit of exports, continues weak despite a slight recovery. Recently released retail sales data for February, showed a 2.3% YoY growth, while 6 months ago sales data showed a 15% decrease. In addition, automotive sales have also reported growth for the past five consecutive months.

Despite this dependence on exports, especially to the US, we expect a continued improvement to local economic activity and that it should contribute more significantly to GDP growth from 2H10. An expected financial inflow of around US$10 bn for the fixed income market should also fuel the local economy.

Inflation decreased slightly in April, despite the economic recovery, showing that there is room for further economic growth without placing imminent pressure on interest rates. Inflation figures in the first half of April pointed to 4.4% inflation in 2010, while our annual estimate remains at 4.9% and market consensus estimate remains at 5.2%.

First quarter results continue to influence our choice for part of our portfolio, while in other cases the catalysts for specific companies’ drive our choice. For April, we added GAP and Geo, increased the weight for ICA (from 5% to 10%), reduced the weight for Grupo Mexico (from 20% to 15%) and withdrew Ara, Cemex and Femsa. With these changes, we have maintained 80% of the total weight of the previous portfolio.

Source: Banif – Ixe 04.05.2010

Brazil: Greece to drive correction and volatility – May 2010- IXE-BANIF Monthly Analysis

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