Street Capitalist: Event Driven Value Investments

Brazil halted its 2 year long interest rate cutting program recently amongst concern of inflation.

Consumer spending rose 5.7 percent in the second quarter from the same period a year earlier, the 15th straight quarterly increase and investment rose 14 percent compared with the second quarter of 2006, while industry rose 6.8 percent, services 4.8 percent and agriculture rose 0.2 percent.

Excessive rate cuts have contributed to this accelerated rate of consumer spending as Brazilians borrow more.

Brazil’s inflation rate in the 12 months through August rose to 4.18 percent, compared with 3.74 percent in the 12 months through July, pushed up by higher food costs, according to the national statistics agency

Due to these new inflation concerns, forecasters are expecting the Selic-rate to remain unchanged for at least till the end of the year or even into 2008.

Since most forecasters are not foreseeing a rate increase, spending in Brazil should at least continue on its current trend which will be favorable for the nation’s economy.

Fundamentally Brazil’s economy is strong and was bolstered recently with the Fed’s 50bps rate cute assuaging fears that demand for Brazilian exports (orange juice, steel, coffee and soybeans) may decline in the US. Additionally, Brazil’s largely diversified export base makes it defensive against any excessive declines in the US economy, especially when compared to other Latin American export countries such as Mexico.

One of the major concerns for investing in Brazil is currency risk, but so far the Brazilian Real has been fundamentally sound. It’s currently situated at 1.869 per dollar, having appreciated 13.9 percent this year so far. Some strategists are even projecting that the Real may strengthen further to 1.85 per dollar in the coming month.

What are some current sectors in Brazil that look attractive?

I’ve been specifically interested in their banking industry, as the country’s middle class grows and it is expected that Brazil’s debt will become investment- grade in the near future. Companies such as Banco Itau Holding Financeira S.A. (ITU) and Banco Bradesco S.A. (BBS) these banks will be able to take advantage of such positive economic trends by offering more lending services, new payment systems, and pension/life insurance offerings.

According to LatinFinance, Brazil’s banks are also the strongest in Latin America.

Itau and Bradesco,
Brazil’s largest private banks, again occupy the top spots in the annual
Management & Excellence/Latin Finance (M&E/LF) ranking of the 40 best large
Latin banks in sustainability, corporate governance and social responsibility
(CSR). The top six banks are Brazilian and Chilean, with BCI at a surprising
3rd.

The following link provides the complete list-
LatinFinance: Latin America’s Most Sustainable Banks

In August BBD reported a 44% second-quarter profit gain and ITU reported a 30% profit gain. Both are engaging in plans to expand their lending, by extending more corporate loans and increasing their presence in auto loans.