Brazil's Near-Term Grows Cloudy

Highlights include Telesp (TSP - Snapshot Report), CPFL (CPL - Analyst Report), CEMIG (CIG - Analyst Report), Telemig (TMB) and Oi Participacoes (TNE - Analyst Report).

There are some mixed signs over the economic environment in Brazil. Yesterday the Brazilian Central Bank released the Focus survey, which is an average of the market assumptions on some key economic indicators. GDP growth for 2009 is now expected to be -0.19%, industrial production is expected to be -3.06%, inflation would reach 4.26% per year and domestic interest rates would be 9.25% per year by December 2009.

Those are for sure not encouraging figures, however there are other things going on...

In March 2009, total auto sales in Brazil were 36.2% higher than in February 2009. Even better, during the first quarter 2009, Brazilian auto sales reached 668,200 units, a growth of 16.9% from the same period 2008.

It is true that this remarkable performance has a lot to do with some tax relief granted by the Government for the auto industry in the beginning of this year. Nevertheless, it was a great achievement.

More tax relief is expected for the near future. The Brazilian Government is expected to cut value-added taxes on products of the so-called white line, including refrigerators, stoves, washers, etc.

We still expect emerging markets in general to outperform more developed economies like the U.S., Europe and Japan. Brazil in particular is an interesting investment case, as it has a lot of room for rate cuts and a very solid banking system which will make the tax cuts effective.

However, the short-term signs remain unclear, thus we still favor less cyclical and higher yield companies like Telesp (TSP - Snapshot Report), CPFL (CPL - Analyst Report), CEMIG (CIG - Analyst Report), Telemig (TMB) and Oi Participacoes (TNE - Analyst Report).