First Signs Of Recovery In The Brazilian Consumer Market

The Chairman of the Brazilian Central Bank, Henrique Meirelles, announced that the amount of credit in Brazil started to grow again in January 2009 after a huge decline in the end of 2008. In fact the total amount of credit in Brazil already returned to the level of September 2008. We consider this fact quite encouraging and we believe Brazil is dealing better with the effects of the credit crisis because of two main reasons:

1.) Brazil still is an unleveraged country; the credit/GDP ratio in Brazil is still around 40%, a very low volume if compared to more developed economies, and

2.) The Brazilian banking system was not affected by the international credit crisis and remains very solid, thus interest rate cuts and more liquidity provided by the Central Bank are not leading to the classical liquidity trap.

A good sign of the recovery in the credit business is the reaction of the Brazilian auto industry. In January 2009, the Brazilian auto industry posted some growth after 5 months of decline. It has produced a total of 186,100 vehicles, almost 100% more than in December. Total vehicle sales reached 194,500 vehicles, 1.5% more than in December 2008. If we compare the current sales with one year ago, the number is still disappointing; in January 2008 total vehicle sales were 255,200.

For February 2009 there are some signs for optimism. In the Rio de Janeiro area alone, sales of cars increased almost 50% in the first week of February 2009 against the same period in January 2009. We believe that the business environment in Brazil will get better in the following months as the Central Bank will keep cutting domestic interest rates and credit and domestic demand will continue to soar.

We have a reasonably optimistic view on the Brazilian economy for the next 12 months, and we still believe that companies with a strong exposure to the Brazilian domestic consumer market could be a great investment alternative. In this sense we are recommending AmBev (ABV), Embotelladora Andina (AKO-A) and Grupo Ultra (UGP).

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