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Brazil – Optimism May Prevail at Last- Monthly Allocation – January 2011

Amid old concerns, the US gives signs of improvement

The New Year will begin in the same way 2010 is ending: full of doubts. However, a more positive mood is emerging in relation to the international economy, at least for the near future. A tendency towards a solid recovery of the US economy particularly reflects this sentiment. Thus, although markets continue to monitor closely the rolling of sovereign and bank debts in Europe, pay particular attention to economic growth in Germany and inflationary trends in China, during January 2011, US economic indicators will probably dominate the spotlight, as analysts seek to confirm signs of a stronger growth.

See detailed report: Brazil – Monthly Allocation – January 2011

The implementation in the US of the fiscal package that maintains tax breaks for personal taxpayers, recently agreed to between the Obama Administration and Congress, supports this optimism. Also, various economic indicators have shown improvement and the overall data pointing to an increase in the speed of recovery is indeed impressive, although in some cases this is slow and in others apparently only transitory. For example, personal consumption has grown consistently in the last few months and growth recorded in October and November indicates that in 4Q10 the increase in the consumption component of GDP may surpass 3% for the first time since 2006. The figures in the indicators of industrial and service activities – ISM Manufacturing and ISM Non-manufacturing – also give grounds for confidence in a faster growth for 2011. Even the labor market has shown some signs of life. Indeed, excluding the surprisingly disappointing payroll data for November, nearly all market indicators have revealed improvements, particularly the drop in weekly jobless insurance claims since the middle of November.

We expect a calm local scenario, with confirmation of the interest rate hikes foreseen for the next months

In Brazil, the minimum wage is set and all signs point to the Central Bank starting a cycle of hikes in the Selic interest rates in January. This should leave the short-term picture clearer. Our basic scenario points to three further hikes of 0.5% in subsequent COPOM meetings, a total rise of 2.0%, maintained until mid-2012.

Additionally, the installation of a new administration always brings hopes of further structural advances. However, several uncertainties cloud the medium-term horizon, such as, for example, questions on how the new Government will conduct its fiscal policy.

We believe that, despite the positive signs expected locally and in the US, a seasonally weak stock market in January will not allow the Ibovespa to recover consistently. Instead, it is likely to continue volatile, but moving sideways. Faced with this, we have not changed our portfolio in terms of the names included. We have only re-balanced weights by reducing the weights for Vale and PDG Realty (from 20 to 15% and from 10 to 5%, respectively) and increasing the weights for Telesp and MRV (both from 5 to 10%).

Source: BANIF – IXE, 03.01.2011

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

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