Brazil Shows Deflation Trend

Deflation in Brazil for First Time in Decades!

Brazilian IGP (General Price Index) was -0.33% for the first 20 days of April against -0.36% for the same period in March. The IPA index (similar to the PPI) was -0.64% during the first 20 days of April from -0.65% in same period in March.

It seems that inflation in Brazil is getting closer to the interactional deflationary trend. This is particularly important at this point because between June and August the annual harvest reaches the most important moment in Brazil and agricultural prices have a seasonal tendency to decline in the beginning of the second half of the year.

In such an economic environment, what seems completely odd are the still unbelievably high Brazilian interest rates. After two cuts this year, Brazilian domestic rates still are at 11.25% per year. We believe Brazilian domestic rates will continue to fall in the very short-term, reaching somewhere in the 9% to 9.5% range in the end of 2009, despite the continued warns of the Brazilian Central Bank over the so called "inflation risk."

In a falling rate environment within an international credit crisis, we continue to believe that high-dividend-yield stocks are the best alternative. We like the Brazilian electric utility industry such as CPFL (CPL - Analyst Report) and CEMIG (CIG - Analyst Report) and telecom utilities such as Telesp (TSP - Snapshot Report) and Oi Participacoes (TNE - Analyst Report).