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Brazil: Greek accord might buy some peaceful time – Monthly Allocation July 2011 – BANIF

Greek accord might buy some peaceful time

We maintain our negative view on the international market for July. In the US, after a series of weak economic indicators, even worse than initially expected, there is no evidence of a turnaround in the short term, especially while the unemployment rate remains at high levels. The ongoing recovery in Japan, together with a slight reduction in commodity prices and the slight reduction in US interest rates (10-yr bonds) seem to us to be a base for some economic recovery that to date has not yet materialized. We believe that potentially increasing inflation might stress the Chinese market, but this possibility remains uncertain for the moment. In the Euro zone, economic indicators tend to play a secondary role to political tension, as the outcome for the Greek debt remains undefined. The recent measures approved by the parliament enabled only the receipt of a tranche of aid previously negotiated. We expect a temporary ease in this tension, which might pick up shortly as it negotiates a second aid package by September, under uncertain political support from all European countries. The dominant feeling is that Greece has no orthodox solution while it remains under the Euro umbrella and tied to its rules. The biggest fear, however, is not of Greece defaulting, but that it would spread the problem to other countries also on the list of troubled economies.

Despite our negative view for international markets, we believe that July may be less negative than June was, mainly due to the temporary ease that the Greek accord brought. However, tensions should increase with the negotiations for the next agreement, expected by September.

Local inflation likely to continue low

Inflation in July might continue low, although not as low as in June, which confirmed and even surpassed the most optimistic expectations. While in June inflation was slightly negative (according to some of the main indexes), consensus expectations for the IPCA in July are around 0.15-0.20%. This reduction was a result of seasonal factors that might lose effect shortly, with inflation likely to pick up as they do.

Delinquency rates increased slightly in June, but we tend to believe this is not a source of concern because: 1) personal income is likely to show improved figures because of the recently reduced inflation and 2) the amount of late payments, the step before writing off debt, decreased for two months in a row.

We predicted that June’s local positive sentiment based on reduced inflation would overcome a bad international scenario, but this did not materialize. We continue with the same views for July, bad internationally and good locally. This time, however, we believe that the negative mood might continue to prevail.

We changed our portfolio to be more defensive, having in mind our somewhat negative view for the market. We have added Tractebel and Telesp (both with 5% stake), two traditionally defensive names, we reduced weight on Even (from 10% to 5%) and have withdrawn Itaú.

Source: BANIF CVC, 01.07.2011

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