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Brazil – Low Inflation to Boost Brazilian Stock Market – Monthly Allocation – June 2011 -BANIF

At best, things should be as bad as predicted

For multiple reasons, we have a negative view on the international market for June. 1) There is evidence of a slowdown in the US economy. 2) In the Euro Zone, following the relatively well made financial aid package for Portugal, the Greek debt problem has become more acute, with evidence of fiscal targets not met and a lack of political will to implement further measures. 3) China has displayed signs of an economic slowdown after strong 1Q figures.

Despite this negative view, we believe in a mild negative evolution of the markets, with no large factors to cause major changes. The market has revised estimates for economic activity downwards and now, in a best-case scenario, we believe in a reality as bad as predicted. The most important single issue to monitor is probably the evolution of the Greek problem, which disruption we believe is certain and dependent on a strengthening of the European financial market to absorb its impact; a condition not yet achieved. A meeting with European leaders will take place on June 24, which might be a catalyst if an announcement of any decision to favor the short term solution for the Greek difficulties occurs.

Local inflation estimates approach zero

Most estimates for June’s inflation are nearing zero. The Top Five survey, for instance, now has 0.06% for the IPCA index. Considering that the reduction is sharp, coming from monthly levels from around 0.8% to near zero (May figure is likely to remain above halfway between one end and the other), we believe that there is still some skepticism in the market of this downward course. With the release of hard data confirming the expectation of low inflation, available around the third week of the month in the form of the previous release of indexes for June, we foresee an increased optimism driving the market prices up.

We believe a materialization of the positive local scenario we predict will have greater influence on the local market than the dimmer international scenario, leading to a rebound in local prices. As inflation has been the most important economic factor monitored, an ease in its pace would cause a wave of optimism.

Having this positive view in mind, we left our previous cautious stance and, to benefit from a rebound in the local stock market, changed our suggested portfolio significantly. We added Copasa and Itau (5% weight each) and increased the weights on Even, Eztec, and Lojas Renner (all from 5% to 10%). Additionally, we withdrew Telesp, Tiete and Tractebel.

Source: BANIF CVC, 01.06.2011

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