Brazil Outperforms Despite Crisis

Monday, Mr. Henrique Meirelles, Chairman of the Brazilian Central Bank, showed some optimism stating that Brazil will be out of the crisis before other countries and that “it is important to guarantee lower domestic interest rates in the near future, so that Brazil can enjoy sustained growth without the imbalances of the recent past.”

This statement is in line with our outlook for Brazilian domestic rates for the near future, and is also not very different from our view that Brazil, and other Latin American countries like Peru and Chile, will outperform more developed economies in the very short-term. However, the optimistic accent of Mr. Meirelles speech could be somewhat exaggerated.

According to the focus survey, a weekly survey in Brazil with banks, brokers and consultant companies on key economic indicators, the GDP growth outlook for 2009 is now -0.3%; it seems the market remains skeptical on short-term recoveries.

Nevertheless, Brazil has been outperforming the S&P 500 (^GSPC) since the end of 2009 as we can see from the chart below (Ibovespa/SP500). In fact, Brazil is one of the best performing stock markets in the world in 2009.

We believe Brazil will continue to outperform during 2009. The economic environment in Brazil is worse than we anticipated, but there are reasons for cautious optimism. Yesterday Paul Krugman said that the Brazilian economy still can show some recovery in 2009 and that it is a relatively good position to face the challenges of the crisis.

We believe Brazil still represents a great investment alternative in the short-term. However, in order to reduce risks we recommend higher exposure to electric and telecom utilities, mainly those who pays high dividends, like Copel (ELP), Cemig (CIG), CPFL (CPL), Oi Participacoes (TNE) and Brasil Telecom (BRP).

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