Latin American Markets

We have been saying since the end of 2008 that emerging markets in general -- and Latin American in particular -- would outperform more developed markets such as the U.S., Europe and Japan. Indeed it has been our mantra in the past few months. Now this view has become the consensus, and Brazil seems to be one of the more interesting places for equity investments.

The so-called BRIC nations (Brazil, Russia, India and China) have been outperforming the market. Through June 10, 2009, according to The Economist, Brazil is up 70.5%, Russia is up 77.5%, China is up 65.9% and India is up 65.3% (all in U.S. dollar terms). In the same period, the Emerging Markets MSCI was up 39.2%, World MSCI was up just 10.3% and the S&P 500 just 4%.

It seems that the decoupling theory that was so criticized recently is back and stronger than ever! After such great performance, we do not rule out some kind of short-term profit taking. Nevertheless, we still believe emerging economies will keep on leading the growth. Even better, the BRIC countries will continue to outperform even other emerging economies, and the outlook for Brazil remains quite encouraging. Brazil will lead the Latin American economic recovery.

We were surprised by the recent decision of the Brazilian Central Bank to cut domestic rates by 100 basis points to 9.25%. It does not mean that domestic Brazilian rates are too low -- quite the contrary. However, we doubted that the very orthodox Brazilian Central Bank would take such an aggressive step after four aggressive cuts in 2009. But it did and that's great news.

We expect much lower cuts in the near future, probably two or three more 25 basis points cuts during the second half of 2009; however, the Brazilian economy seems primed for sustainable recovery in the very short-term.

As we also predicted, the Brazilian currency has been recovering fast in the last months -- a trend that we expect to last. Even after some aggressive interest rates cuts, Brazilian rates are much higher than anything comparable in the U.S. and Europe and we do not expect Brazilian rates to fall below 8.5% in 2009. Additionally, other fundamentals remains solid, like the positive trade balance, small current account deficit, no net external debt and international reserves over US$200 billion.

Finally, the weakness of the dollar has been a major force behind the price recovery of the commodities, which is good for Brazil as a commodity producer. We believe international investors are now seeking geographical and currency diversification, and this trend will continue in the following months.

OPPORTUNITIES

In such a business environment, we would recommend some Brazilian domestic-focused companies like telecom companies such as Vivo ( VIV - Analyst Report ) , real estate companies like Gafisa ( GFA - Snapshot Report ) , consumer goods producers like Embotelladora Andina ( AKO.A ) , the oil giant Petrobras ( PBR - Analyst Report ) , high-dividend utilities like Telesp ( ) and Cemig ( CIG - Analyst Report ) .

WEAKNESSES

On the other side, we would avoid highly leveraged raw material producers exposed to the U.S. market, like Gerdau ( GGB - Analyst Report ) and Cemex SAB de CV ( CX - Snapshot Report ) .