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Brazil:High Volatility Still Prevailing – December 2010 – IXE BANI-Monthly Analysis

Tension in Europe and USA likely to overshadow positive economic news.
Brazil – Monthly Allocation – December 2010

While key indicators of economic activity in Europe, USA and Asia point to an acceleration of growth in 4Q10, prospects for the international environment up to the year-end cause concern, since chances are that the problems affecting some of the “peripheral” countries in the Euro Zone as well as the USA will continue to weigh on the financial markets. In the Euro Zone, Ireland is likely to remain a major source of volatility in the next few weeks due to the instability of its financial system and the political debility of its current administration.

Nevertheless, even more relevant is the renewed market pressure on Greece, Portugal, Spain and Italy, which has led to the resurfacing of fears on the future of the Euro. Meanwhile, in the USA, legislation on temporary tax breaks to individuals expires at the end of this year and must be renewed. However, the Obama administration is likely to face difficulties in rapidly getting this from the new Congress. In all, despite the possible positive news from the economic front, the international environment is likely to weigh on the financial markets.

Main local risk is the deterioration of inflation expectations, while doubts on the economic policy mix might bring volatility
In Brazil, Dilma’s election was expected to maintain a high degree of economic predictability and indeed, the appointment of the new administration’s economic team underscores the perception of continuity. However, some contradictory signs have generated doubts regarding the economic policy mix in the new administration. For example, the pro-cyclical structure of government spending is not aligned with the supposed goal to reduce real interest rates to around 2% to 3% in coming years. Another example of contradiction is Dilma´s  commitment to control inflation vis-avis the pressure on the integration between the Central Bank and the other economic authorities, which might reduce the BCB´s autonomy.

In this context, a decision on the minimum wage, to be taken by the end of the year, and the Central Bank´s attitude towards the deterioration of inflation expectations are key factors and could lead to an increase in market volatility.  Hence, from the point of view of the macro-economic agenda, prospects for the financial markets in the next few weeks appear more uncertain than usual.

In the face of this, we have changed our portfolio by reducing its size by two names, eliminating CSN and Tractebel. We have also substituted Guararapes for Lojas Americanas so as to reap the benefits of Christmas more efficiently, and we have also increased the weights of Bradesco and Hering (both from 5 to 10%).

Source: IXE-Banif, 01.12.2010

Filed under: BM&FBOVESPA, Brazil, Latin America, News, , , , , , , ,

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