Brazil makes a strong recovery

May be the best emerging market for coping with the current storm

By Cheryl Devoe Kim
Globe Investor Magazine Online, April 14, 2009

While North American stock watchers debate whether or not the March rally was the beginning of a true recovery, investors in Brazilian stocks are watching to see whether the six-month return on the country's main index will exceed 50 per cent. The Ibovespa has climbed 54 per cent from its October low, including a 7.2-per-cent return in March.

Brazil, with a large middle class and a service sector that composes more than half of the economy, is less dependent on trade than other emerging markets such as China, said Richard Kelly, senior economist at TD Bank in Toronto. That makes it less vulnerable to the health of the American consumer.

That's not to say that Brazil has been shielded from the recession. The country's economy shrank a staggering 3.6 per cent in the fourth quarter from the third quarter, with a "sudden shutdown" in production, including a massive collapse in auto production, Mr. Kelly said. He expects Brazil's economy in the first quarter to shrink a further 1.5 per cent from the fourth quarter. But he says there are already signs of recovery, and he thinks the country's economy will start to grow again this year.

"They stabilized without a lot of intervention," Mr. Kelly said. "They seem to be the best placed of the major emerging markets to get through the current storm."

Luiz Ribeiro, who manages the Latin America Freestyle Fund for HSBC Halbis in Sao Paolo, says the Brazilian economy has also benefited from a stable banking sector that wasn't affected by the subprime credit crisis. Bank capitalization ratios are above 11 per cent and non-performing loans have not become an issue. For those reasons, he likes two of the country's leading banks, Banco Bradesco SA and Itau Unibanco Banco Multiplo SA, both available on the New York Stock Exchange through American depositary shares. Mr. Ribeiro also likes massive oil company Petroleo Brasileiro SA, better known as Petrobras, which he believes will outperform other oil companies due to an expected strong growth in oil reserves from its Tupi project, deep under the water on the east coast of Brazil .

Iron ore producer Companhia Vale do Rio Doce, known as Vale, is another company that Mr. Ribeiro expects to make gains this year. The company's stock has lost about two-thirds of its value since May, due in part to a belief that Vale may be facing a drop of as much as 40 per cent in iron ore prices. But Mr. Ribeiro thinks the iron price drop may be closer to 15 to 20 per cent, depending on the success of monetary and fiscal stimulus worldwide, providing some upside in the Value share price.

Special to The Globe and Mail