Latin America CIO Announces Healthy Outlook for Brazil
April 11, 2011
New York and São Paulo
In advance of upcoming meetings in the U.S., Mirae Asset Global Investments São Paulo-based Chief Investment Officer for Latin America, Young Hwan Kim, released the following four key observations about the Brazilian market:
- Market sentiment in Brazilian stocks is bullish.
- The new government in Brazil has been successful at maintaining high levels of industrial and consumer confidence.
- The threat of taxes on capital inflows to Brazil and other measures to manage growth and inflation remain an overhang on the market.
- Domestic demand will carry the day in Brazil over the medium- and long-term.
Market Sentiment is Bullish on Brazil
The 4Q 2010 earnings season in Brazil is almost over with most of the companies reporting strong top-line and earnings growth driven by strong domestic demand. Moreover, the Ibovespa is almost flat year-to-date despite the strong earnings growth reported in 2010 (+45% in USD), which further increases the discount to its peers.
The first quarter has ended with Brazilian equities regaining ground. The Brazilian markets performed well in March with the MSCI Brazil rising 2.3% in dollar terms, taking 3-month gains into the black. March's good performance is explained by strong fourth quarter earnings, M&A activity in the telecom sector and increasing expectations of a lower tightening cycle in Brazil.
New Government Continues to Instill Confidence
With consumer and industrial confidence remaining at a high level, and with the Central Bank giving signals that the tightening cycle in Brazil may be more relaxed than previous expected, Kim thinks that overall economic indicators remain positive.
The telecom and the utilities sector were the positive highlights of the month of March. The strong outperformance of the telecom sector was driven by merger between AT&T and T-Mobile, which boosted local stock valuations. Outperformance in the utilities sector was due to (1) valuation discount versus its historical average; (2) the sector being broadly hedged against inflation; and (3) government willingness to resolve concessions in 2011.
On the other hand, Kim observes, the materials sector underperformed the benchmark on the heels of (1) rising concerns over the CEO change at VALE; (2) tax litigation; (3) Gerdau's plans to raise around USD2.4 billion via a new equity issue.
In terms of monetary policy and inflation, Kim thinks the focus this month will be on the Central Banking meeting on April 19th and 20th. The market is expecting a 50 bps hike in the interest rate and will keep monitoring closely the evolution of economic data to be released in order to forecast the size and the length of the monetary tightening in Brazil.
Threat of Taxes on Capital Inflows and Other Measures Remains an Overhang
Commenting on the actions of the Brazilian Central Bank, Kim offers that the recent Quarterly Inflation Report from the Brazilian Central Bank presented a dovish scenario. While this may alleviate concerns in the short-term over any deep-rooted inflation pressures, Kim is becoming increasingly concerned that the failure of policymakers to nip the inflation problem in the bud may simply postpone the issue until 2012. The high level of indexation within the economy, and the backward-looking nature of the indexation adjustments, means that inflationary pressures are likely to continue for some quarters, as salaries, benefits and tariffs are increased.
The Central Bank is rightly concerned about the appreciating Real and its impacts on the competitiveness of selected industrial sectors within the economy, and this will limit the probability of significant further monetary tightening, and subsequent capital inflows seeking yield. However, we would rather see greater fiscal discipline and spending control, instead of non-orthodox measures, including financial transaction taxes, as part of the solution. The threat of IOF1 hikes and heterodox, macro-prudential measures to limit credit growth, remain overhangs for the Brazilian market.
Strong Domestic Demand to Carry the Day
Additionally, Kim thinks that increasing oil prices due to tensions in the Middle East are leading investors to focus on the possible impacts on Latin American economies. Higher oil prices may affect Latin American countries directly through import and/or export prices, higher headline inflation (with potential impact on policy rates), and change the fiscal balance in some cases. But over the medium- and long-term, countries like Brazil with its strong domestic demand, its wealth of soft commodities, and resources like mineral and iron, coupled with a stable government and a relatively robust central bank will carry the day for investors interested in emerging market opportunities.
Kim joined Mirae Asset in 2000 and was named Head of Latin American Equity in 2007 and 2008 when he was based in the UK. Now based in São Paulo, he manages a number of flagship Mirae Asset portfolios and is the firm's Chief Investment Officer for Latin America.
1IOF tax is the commonly known acronym for Brazil's tax on foreign exchange transactions.
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