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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

Filed under: BM&FBOVESPA, Brazil, China, News, , , , , , , , , , , ,

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

Filed under: Brazil, Latin America, News, , , , , , , , , ,

Brazil – Current Scenario Keeps the Market on Tenterhooks– Monthly Allocation- May 2011

Internationally, Advances Should Continue Slowly but Surely
We foresee a relatively neutral international scenario for May, but the outlook for the global economy seems unlikely to improve in the upcoming weeks, and several issues might continue to raise investors´ concern. In the US, the government’s debt ceiling issue is unlikely to cause any market disruptions, but it could generate some nervousness. Also, although economic activity continues to grow, the increase of the jobless claims in the last two months could cast some doubts on consumption’s short term outlook. Meanwhile, in the Euro Zone, Spain has continued to manage to sell debt as scheduled, and talks between Portugal and the EU on the financial assistance package have progressed. Nevertheless, the fact that Portugal will hold general elections in June and Finland’s population have shown growing resistance to EU’s current assistance framework indicates that the road to the package is likely to be bumpy, generating some noise and fear.


1Q Results Season to Drive the Market
In terms of the domestic scenario in Brazil, an uncertainty mood is likely to continue concerning the Federal Government fight to curb inflation. The government has continued to try to fight inflation without jeopardizing economic growth, which generates many doubts on the economic outlook for 2011 and 2012. On the other hand, the Central Bank has, at least, acknowledged that the monetary tightening cycle will have to be extended, which is encouraging. In all, the local macro scenario tends to generate less anxiety, because market players will live for some time with the prolonged gradual tightening of the monetary policy, the slow appreciation of the Real, some fiscal tightening, and remaining doubts on whether the government’s strategy will work.

The first half of May will concentrate the majority of the 1Q season reports. Given the aforementioned scenario, where nothing impacting is expected, the market should be driven this month by corporate results and news. With most of the 1Q macroeconomic figures already out, we do not believe in unexpected results except for specific exceptions.

Having this calmer outlook for the local economy in mind and with the negative bias from the still unabated inflation, we continue believing in a volatile stock market for May with a slightly negative trend. Given this, we have changed very little our previous portfolio for May. We included Raia and Telesp, with 5% weight each. We also withdrew HRT from the list, due to the potential overhang with the end of the lock up agreement between the pre IPO shareholders. With these changes, we increased the total number of companies by one so we re-balanced the lower weights to 5%, from 6%.

Source:BANIF, 02.05.2011

Filed under: Banking, Brazil, Latin America, News, Risk Management, Services, , , , , , , , ,

Brazil – Measures to Curb Inflation in Limelight – Monthly Allocation- April 2011

International Scenario Might Calm the Market in April

March brought to Europe, Northern Africa and Asia, a number of serious events, such as the disaster in Japan, civil war in Libya and the fall of the Portuguese Cabinet, which affected most markets negatively. However, we expect the international scenario to improve in April for two main reasons. First, these events were of a non-recurring nature. Second, key indicators suggest economic recovery in China, US and Europe continues, despite all the social and political turmoil mentioned above, and the inflationary pressures.

Brazil – Monthly Allocation – April 2011 detailed report

All attention focuses on the next move by the Central Bank

Inflation continues at a high level, while economic activity also seems intense. Credit figures released in February were high, although there were doubts about the base of comparison, with Carnival holidays having been in February in 2010 and March in 2011. Data on credit suggests that average maturity terms for credit lines increased, which might explain part of this behavior, as it reduces the concern of an increase in the level of interest rate hikes.

This unabated inflation is evidence that Government action was not enough, indicating the need for further measures. We are still in the middle of the interest rate hike cycle intended to curb inflation. In April, we bet on a final 50 basis points hike for this ongoing move, to 12.25%, after which we believe the Central Bank will wait and see if it needs to increase rates further in the final part of the year. After this last move, it is likely that the CB will make use of alternative measures to continue its fight against inflation. We believe that the market mood will depend greatly on what it decides. If it announces further measures in April, we believe market tension should ease while, if it does nothing more, nervousness might prevail.

Another issue not likely to affect the short term, but which should appear more and more on the market’s radar, is the possibility of Moody’s rating agency upgrading the Brazilian sovereign risk. The agency suggested that it might do so by the end of the second quarter. Currently, Brazil remains at the lowest investment grade level, ten levels below the top of the range.

After the results season, and with this expectation of a tense local scenario, we have changed our portfolio for April. We increased the weight of Vale to 20 from 15% and made substitutions with the same weights: 1) Eletropaulo for Tractebel, with dividends already paid out, and 2) We substituted MRV and PDG for Even and EZ Tec because the first two reported reduced margins. Finally, we withdrew Telesp, as the share performed well and we see no short-term catalyst.

Source: BANIF, 01. April 2011

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

Brazil – Increasing Risks Might Harm Markets- Monthly Allocation – March 2011

Political tension and increasing international commodity prices

We have seen the rise of commodities prices as a risk of inflation, which ultimately would pose a risk to interest rates. Rising inflation, pushed by costs that would then cause interest rate increases, is unwanted while economic activity does not pick up. Additionally, tensions in North African countries have sent oil prices up as well, which reinforces the scenario of an increase in costs.  Brazil – Monthly Allocation – March 2011

The tension in North African countries is likely to be the dominant international event during March. Following the movement started in Egypt, which led to the fall of a long established dictatorship, other countries, with similar political structures, have started having protests, with unpredictable outcomes.

In China, the celebrations of the local New Year halted release of economic data. However, from the data so far released, we see unchanged risks and believe the country suffers from the increase in commodities prices, as does the rest of the world.

Apart from these political and commodities problems, indicators continue to point to an improving economic activity for the US and Europe, although still at a slow pace.

Local risks still relate to inflation

If the political tension does not deteriorate much further, we believe that local problems in Brazil will dominate the mood of investors. The main local ST risks we see are the still unknown extent of the inflation surge and the efficiency of the measures taken.

After the initial optimism at the beginning of the year, we continue to see a deterioration of expectations, which should continue until the wave of price increases comes under control. Additional to these price increases, the minimum wage, an additional important price, is about to be formally indexed. The approval of this year’s minimum wage comes together with a formula for automatic future adjustments, which formalizes a hitherto informal methodology. With this measure, the government reinforces the need to control other sources of inflation. These include other possible budget costs, the increase in interest rates, credit expansion, etc.

The Government has attempted to control inflation through a reduction of economic activity. The risk here is that the measures may cause an excessive economic slowdown and, for instance, bringing GDP growth below 4% this year (while current expectations are of a GDP around 4.5%).

With this scenario, we have changed our portfolio to make it more defensive, more linked to inflation-adjusted revenue companies and less dependent on companies related to credit and GDP growth. We have included HRT with a weight of 5%, and increased Eletropaulo’s weight (to 10 from 5%). We have also reduced the weight of MRV (to 5% from 10%) and withdrawn Hering.

Source: BANIF, 01.03.2011


Filed under: Brazil, Latin America, News, , , , , , , , , , ,

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, , , , , , , , , , , , ,

Mexico: Economy Continues Slowly to Our Targets – November 2010- IXE BANIF – Monthly Analysis

Mexican growth motors continue to balance out

Since last month, we have experienced a re-balancing of growth drivers, with improvement of local demand and a slow-down in exports, the main growth motor. Exports have reduced their YoY growth rate from the nearly 50% of the beginning of the year, although it remained at a high 21% in September. We expect this deceleration to continue until 2011.

Mexico – Monthly Allocation – November 2010

During October, we renewed our good expectations for growth of the Mexican economy with the release of statistics for September: a) Internal retail sales increased 4% YoY; b) consumer confidence grew 12% YoY; c) 780k new jobs created in the first nine months. Concerning job creation, this level was a record high for the same period and mainly due to the export industry. We maintain our expectation for the creation of 650k new jobs in 2010 (seasonally, there is job reduction at year-end) and 530k in 2011.

Despite these changes in export and local demand, we maintain our expectation of a 4.4% GDP growth for 2010 (while market consensus remain at 5%) and 3.7% for 2011. For our 2011 forecast, local demand still has to catch up, as we predict a further decline in exports.

For our November portfolio, we have added Femsa and increased the weight of Grupo Mexico from 15 to 20%. We have reduced the weight of Mexchem from 15 to 10% and withdrawn Soriana.

Mexican tidbits

Inflation remains under control, although the first data collected for October, indicating a 0.5% increase, was slightly above our and market expectations. We continue expecting 4.5% for 2010, with the belief that interest rates increase no earlier than October 2011, although the growth of inflation in the recent past may allow postponement to the beginning of 2012.

The Mexican Peso reduced its volatility in October, appreciating from the 12.6 P$/US$ at the beginning of the month. Our forecast is currently at 12.4 for the end of 2010 and 12.2 for the end of 2011.

Source: Banif – IXE, 05.11.2010

Filed under: BMV - Mexico, Latin America, Mexico, News, Services, , , , , , , , ,

Brazil: Full and Inconclusive Agenda – November 2010- IXE BANIF – Monthly Analysis

Invisible hand might move the US market

For November, we expect no relevant data coming from the economic indicators in Europe or in the US. One of the main drivers of the month, however, should come from the FED in its meeting on the 2nd and 3rd. We expect immediate action announced in the form of purchases of securities in the financial market, irrigating it by around US$500bn in six months. Last month, deflation was the biggest fear but since then, rumors of FED actions have turned these fears into expectation of inflation. The first practical signs of this change happened at the end of October, when the Treasury sold US$10bn of 5-yr Treasury Inflation Protected Securities (TIPS) with negative yield, indicating that investors are already betting on increasing inflation. The full effects of a government-induced inflation are uncertain, but we believe that the initial sentiment on such an announcement would be positive.

Mixed drivers for Brazil

We believe investors will closely monitor six main factors in November that should affect the local market: 1) The performance of foreign markets; 2) the end of the bad feeling on Petrobras’ capital increase; 3) the end of the elections; 4) companies 3Q earnings; 5) the stability of Brazil’s FX and 6) the domestic economy. The first three items are likely to be positive. Items 4 and 5 can be mixed and bring volatility and item 6 is likely to be seen negatively. Given these mixed drivers, we foresee the same scenario we projected for October: the market moving sideways with volatility.

We have heavily changed our suggested portfolio again, as we did last month, with the inclusion of Petrobras and Lojas Renner (with weights of 20% and 5%, respectively). We have reduced weights on Guararapes, Telesp and Tractebel (both from 10% to 5%) and have withdrawn Itaú and OGX.

Brazilian Economic Indicators Published in November Weaker

We see the end of elections as positive, as it will leave a great source of stress behind and, independent to the outcome, differences between the two candidates are likely to have practical effects only in the medium term. The most immediate potential stress that can arise after the elections result is likely the announcement of names in the top positions of the new government.

The appreciation of the Real since the Petrobras capital increase stressed the government and other economic agents until the government decided to increase IOF taxation sequentially, first from 2% to 4% and then to 6%. First indications show stability of the FX, but the government will certainly monitor to see if these measures were sufficient to reach long lasting stability. We foresee further action from the Government should the Real start to appreciate again.

In economic terms, we believe that Brazil’s November indicators, published in November, should be weaker than those published for a long stretch of months. The reason for this view is our expectation for three indicators: 1) retail sales; 2) industrial production and 3) activity index (Central Bank measure that indicates GDP performance and precedes its release). We foresee negative figures for the first two and nearly zero for the third.

Source: Banif-IXE, 01.11.2010

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Mexico: Economy Steady in Low Gear – October 2010- IXE BANIF – Monthly Analysis

Motors of Mexican growth start balancing out

As we mentioned last month, the Mexican economy has slowed down. Our forecasts for GDP growth remain unchanged at 4.4% and 3.7% for 2010 and 2011, respectively, in line with Government expectations (of 4.5% and 3.8%). We believe that the economy will not slow down further and that export and local demand will become more equitable. While the slower growth of the US economy reduces the prospects for exports, local demand has started to improve, as seen by the 2Q10 YoY internal consumption growth of 4.8%.

Locally, the Mexican construction segment continues the weakest in the industrial sector, with manufacturing leading the economy. As local demand picks up, we foresee a change in consumption from non-durable to durable goods.

Mexico – Monthly Allocation – October 2010

A political discussion on the budget for 2011 will start in Congress in November. We believe that this is likely to bring volatility to the market, as it should affect the Mexican currency and local bonds. Prudent fiscal policies are likely to continue and we expect the government to propose a cut in fiscal deficit. We also believe that this proposal is already expected and, at least partially, priced in.

Mexican tidbits

Inflation is apparently under control, after positive signs that led the government to admit that its 5.25% target for the year is high and that it should converge to market consensus’ 4.5% (our forecast continues at 4.7%).

After the volatility of the Mexican Peso in August, we believe that the rally is likely to cease and our new expectations for the FX are of 12.4 (from 12) and 12.3 pesos per US dollar by the end of 2010 and 2011, respectively. We base this expectation on the belief that cyclical inflows other than exports, such as remittances (linked to US employment), tourism (linked to US consumer confidence) and foreign direct investments (linked to US private profits) are likely to remain weak.

For October, we have reduced the total number of names in our portfolio from 11 to 8. We have added Soriana and increased the weights of LABB (from 5 to 10%) and Mexchem (from 5 to 15%). We also have withdrawn Chedraui, Femsa and Televisa.

Source: Banif-IXE, 04.10.2010

Filed under: BMV - Mexico, Exchanges, FIX Connectivity, Latin America, Mexico, News, , , , , , , , , , , ,

Brazil: Clouds still surround the US economy – October 2010- IXE BANIF – Monthly Analysis

Fear now is of deflation in the US

The US economy has shown signs of weakness since the beginning of 2H10 and now indications of a possible deflation have surfaced. This new fear is like a two edged sword. On one hand, the imminent risk of deflation is a deterioration from previous conditions but on the other, it might force the Central Bank to accelerate its actions to stimulate the economy. In our opinion, the market would see faster action as positive in the short term. In this respect, it is worth mentioning that the first set of economic indicators released in October displayed neutral results.

In the absence of strong market drivers worldwide in October, and with a weak local agenda (the most important factor is the Presidential elections), we believe the trend is likely to be neutral for the month, although with volatility. We foresaw the same scenario for September, but the 6.6% appreciation of the Ibovespa, caused by the easing of economic concerns, surprised us.

In Europe, we have clouds in Ireland after the Irish Central Bank announced that Allied Irish Bank would need around €30bn of extra capital by year-end. However, in our view, if problems in the region remain contained to Greece and Ireland, Europe should not be a concern and ought to continue its slow recovery. In Asia, we expect neutral events, with no problems arising in China.

Brazil – Monthly Allocation – October 2010

In October, with no major operation scheduled, we believe the market will follow the economic and political news more closely. This month, we have made substantial changes in our portfolio, substituting companies having 35% of our previous total weight. The new names are PDG Realty (with a 10% weight), OGX, CSN and Itaú (with 5% each). We have also increased the weights of Telesp (from 5 to 10%) and Vale (from 15 to 20%).

Outlook for Brazil continues Bright

In Brazil, we expect the current strong economic demand to continue and believe in the likelihood of an upward revision for 2011 GDP growth forecasts, currently at 4.5% (Focus poll). For 2010, growth is relatively undisputed to be in the 7.5-8% range.

In our opinion, the political dispute in the presidential campaign can bring about one of three scenarios to affect the stock market: 1) Labor’s party, Dilma, wins in the first round; 2) a second round takes place, with a continuation of Dilma’s current advantage or 3) Dilma loses ground in a possible second round. We believe that the first and second scenarios are likely to have no effect on the market, as we have seen no response to Dilma’s advantage so far. If the third scenario takes place, it is likely to bring more volatility to the market. Investors may view this as positive but, as they note that the difference between the two candidates is in the details instead of being radical, the event should have limited positive impact. In overall terms, we think a second round would be beneficial, as it would force a greater balance between the country’s political forces.

Source: IXE-BANIF, 01.10.2010

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Mexico: Drifting Toward Troubled Waters – September 2010- IXE BANIF – Monthly Analysis

Slow US economy decreases Mexican expectations

The structure of the Mexican economy is unchanged when it comes to the breakdown between local and export markets, and we base our expectation for Mexican economic growth on both markets. We continue to expect a 4.4% GDP growth for 2010 (growths of 4.3%, 7.6%, 4.0% and 1.9% for each quarter, sequentially) while other, more aggressive houses, have reduced this from 5% to nearly 4%.

Despite the most recent reduction in 2H10 growth expectations, we maintain our figure in the belief that the local market will compensate for a likely weaker export scenario that heavily depends on the US economy.

We have assumed since last month that the US would grow at a lower than previously expected pace. Locally, the Mexican construction segment has been the weakest in the industrial sector, while manufacturing has led the economy. We expect export companies, which have been suffering from the weaker foreign market, to recover by year-end, although car exports have performed well even during these tougher times.

Mexican tidbits

Mexico’s inflation has been increasing and, from the current annualized 3.7%, we maintain our expectation of it reaching 4.7% by year-end. We believe that our expectation of interest rate hikes in 3Q11 might become market consensus soon.

The FX has moved negatively lately, after three months without definite direction. It has surpassed the P$13/US$ line, the worst level since the end of June. We still expect it to be at P$12 by year end but, if we do not see a downward movement over the next weeks, we might change this expectation to a P$12.25-12.35 range. We do not believe this potential change in the FX scenario would cause any change to Mexican exports, with the main driver here continuing to be the strength of the US economy (and demand).

For August, we have added Alsea and Femsa to our portfolio and increased the weights of America Movil (from 20% to 25%) and Walmex (from 10% to 15%). We also reduced the weights of GenomaLab and Geo (from 10% to 5%), and have withdrawn Cemex.

Read the full market analysis Mexico – Monthly Allocation – September 2010

Source: IXE-Banif, 01.09.2010

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Brazil: US economy still in the spotlight – September 2010- IXE BANIF – Monthly Analysis

Little hope for a short-term change in the economy

For September, we foresee that attention will continue focused on the US economy, which has been showing signs of weakness since the beginning of 2H10. This expectation is the same we had for August, which proved to be correct. The main event we highlight for September is the FOMC meeting on the 21st, which might raise market expectations of new measures to improve economic growth. The latest statement on the economy from the President of the Central Bank mentioned that the Bank is ready, if necessary, to intervene to adjust the economic trend. However, its portfolio of potential measures is, in our view, limited due to the current low level of interest rates. Meanwhile, data released on housing, payroll and investment are likely to drive the market in the ST.

Concerning the rest of the world, we believe that Europe will continue out of the spotlight, with Germany leading the local economy well. We believe that the only negative in the month could come from China, which has been releasing some mixed and inconclusive data lately.

In September, with little change in the scenario and no major event in sight, we expect the market to move sideways and with less volatility. Therefore, we decided to maintain our defensive view and keep the core of our previous portfolio. We have added Tietê, MRV and EZ Tec, increased the weight of Petrobras (from 15 to 20%) and reduced the weight of Eletropaulo (from 10 to 5%). We have withdrawn B2W (weak 2Q results without good ST expectations), CSN (due to its deteriorated ST outlook) and Tegma (stellar performance in the month).

Petrobras is the month’s highlight

Last month, we predicted that the start of the political TV campaign in August, at presidential level, would be exciting and move the markets. The reality proved to be very dull, with the Labor Party’s candidate having the unquestionable advantage and no response at all from any of the main financial markets: equity, interest rate and FX. In September, we believe that Petrobras’ capital increase operation will be the highlight. The weak performance of the company’s shares in the past 1.5 years contributed to holding down the Ibovespa. We believe that, after the capital increase, they can have the opposite effect.

When it comes to economic data, we believe the two most important events of the month will take place in the first week. These are the Copom meeting on the 1st and the 2Q GDP report on the 3rd. We expect an unchanged Selic rate of 10.75% for the former and a 1% change for the later (QoQ seasonally adjusted, or around 8% YoY).

Read full analysis Brazil – Monthly Allocation – September 2010

Source: IXE-BANIF, 01.09.2010

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Brazil Macro August 2010

According to the IPCA-15 index, inflation was -0.05%. The inflation deceleration process, which was initially characterized by a positive shock of food prices and the seasonal favorable behavior of clothing prices, has gradually become broader and longer than originally thought. The inflation outlook points to IPCA reacceleration down the road, but low current inflation is postponing this scenario. In all, the Selic rate is likely to be maintained stable in the next COPOM meeting.

According to the IPCA-15 index, inflation was -0.05% in the 30 days ended in August,13th. Since the end of June, retail inflation, measured by the IPCA and the IPCA-15 indexes, has remained at a very low level, close to zero, and chances are that this will not change in the short term.

The diffusion index rose slightly to 52.9, from  48.7 in the end of July, showing that a larger percentage of items from the inflation basket has faced price increase. However, diffusion´s moving average is declining (see chart on the right), suggesting that inflation is likely to keep decelerating. Also, there is indeed a growing number of groups of goods or services posting deflation or declining inflation. For instance, according to August´s IPCA-15, food at home, furniture, home appliance, electronics, clothing, footwear, textiles, pharmaceuticals and communications posted deflation. Eating out of home, fuel and energy for housing, health services, personal care and recreation are posting significant lowering inflation.

In sum, the inflation deceleration process, which was initially characterized by a positive shock of food prices and the seasonal favorable behavior of clothing prices, has gradually become broader and longer than originally thought. As a result, 12-month core IPCA and services inflation have begun to drop, which is surprising because the level of capacity utilization is close to a record high, unemployment is at a record low, the aggregate wage bill is rising and there are signs of supply shortage in some sectors.

The inflation outlook points to IPCA reacceleration down the road, because of the underlying economic conditions, the fact that wholesale prices have increased, and the high probability that wage negotiations, scheduled for the following months, will lead to real wage increases above productivity gains. Nevertheless, low current inflation is postponing the IPCA reacceleration scenario and, to be fair, weakening it too, as it helps align inflation expectations with the inflation target. In all, August´s IPCA is likely to be around 0.1% and the monetary policy committee – Copom – seems poised to maintain the Selic rate stable in the next meeting, scheduled for September,1st.

Source: Banif – IXE, 20.08.2010 Mauro Schneider

Filed under: Brazil, Latin America, News, , , , , , , , , ,

Brazil: Market now with eyes on US growth – August 2010- IXE BANIF – Monthly Analysis

Spotlight moves from the euro zone to the USA

In August, we foresee the financial markets moving their attention from the euro zone to the USA. We also expect China not to have much influence on market performance this month. The results of the bank stress test released in July seem to have calmed the market and caused fears of bankruptcy to fade. The data did not indicate that problems are over, but left the feeling that they are under control with the adjustments made so far. On the other hand, the hopes that the US economy would gain momentum have diminished after the FED’s Presidential speech at the end of July. Given this, we believe that published economic data are likely to drive the market, as they will give a better idea of trends. However, as we do not foresee any data released this month as important enough to change expectations, we believe the market is likely to move sideways.

Brazil – Monthly Allocation – August 2010

Last month, we foresaw a volatile market with no trend for July and based on this belief, compiled our portfolio with a defensive view. Despite this estimate, the market did rally and our portfolio followed the trend, demonstrating that it was able to perform well in upward as well as volatile movements. For this reason, we decided that, as we do not identify any definite catalyst driving the market in August, we would change our portfolio very little and continue our defensive view. We have reduced the weights on Bradesco and Hering (from 10% to 5% each) due to their recent stellar performance. We have also substituted Tietê for Eletropaulo, with the same weight, and added Telesp.

Focus on slowdown of US economy

The latest indications of a slowdown in the US economy point to a 2.5% GDP growth for 2010, from a previous 2.7%. This reduction, although immaterial, cooled down previous expectations of upward revisions in estimates and turned attention to stimulating growth. On August 10, attention should focus on the FOMC meeting to see if a change in the monetary policy is possible. However, with interest rates already close to zero, there is probably little to be done on this front. Monitoring the labor market (unemployment and payroll) is perhaps the best hope for investors to find economic improvement.

The real start of the Brazilian Presidential race

On August 17, presidential candidates will start their TV campaigns. Although candidates have been campaigning on the road for a while, many people see TV campaigns as the most important and decisive part of the presidential race, so voting polls that start after this are closely followed and should affect the market. Another potential source for market stress is the end of the low inflation period (last two months, caused by food prices) that we foresee for August. Although we expect inflation to remain at around 0.4% per month until December, people may view any rebound negatively.

Source: BANIF – IXE, 02.08.2010

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

Mexico: Fears of Economic Slowdown Unfounded – July 2010- IXE BANIF – Monthly Analysis

The big picture remains unchanged in Mexico, with a high dependency on exports to the US, and a slow recovery of the local economy. Given this, growth still depends on exports, with the local economy playing a secondary role. Recent economic data released for the US economy frustrated expectations of a slightly better performance. However, the data was not bad enough to change the medium term outlook, or reverse the positive trend. Therefore, we believe that the Mexican economy continues to tend towards a recovery, as the main problems facing the world remain in Europe, a region that has very little impact on the country. In any case, a potential economic slowdown in the US continues as the main risk to our moderate optimism.  Mexico – Monthly Allocation – July 2010

For July, we have added Mexchem, Urbi, Autlan and Asur to our suggested portfolio, reduced the weight of Cemex (from 10 to 5%) and withdrawn Gap and Geo.

We continue to expect a GDP growth of 4.4% for 2010, despite the expected release of a 5.5% figure for 2Q10. The reason for this is that we expect a deceleration due to a higher comparison base, which is likely to reduce 3Q and 4Q growth to 4.5% and 3.8%, respectively. This does not conflict with our expectation of a slow recovery of the local market during 2H10, as the slower growth will occur due to the stronger base.

Mexico has also been building its international reserves, which now stand at US$100 bn. We believe that, if oil prices remain stable, these reserves may reach US$140bn by YE. These large reserves are another positive feature of the local economy, as they give liquidity to the country at a time when other regions, such as Europe, are suffering from a tight credit situation.

Source: IXE, Banif, 02.07.2010

Filed under: BMV - Mexico, Exchanges, Latin America, Mexico, News, , , , , , , , , ,