Brazil's Improving Economy: Morgan Stanley Joins the Bandwagon

Some months ago during the difficult moments of the financial crisis, Morgan Stanley (MS) (Snapshot Report) issued a report forecasting a GDP contraction of 4.5% for Brazil in 2009. We always had a more benign view on emerging markets in general and Brazil in particular.

We had been stressing that: (i) the Brazilian banking system remains sound, (ii) domestic interest rates have huge room for cuts and (iii) Brazil is still a "closed" country which does not rely overly much on exports and imports. All this together points to a more positive economic environment in Brazil in 2009, if compared to more developed economies like those in Europe, the U.S. and Japan.

The more positive view on Brazil (and other emerging markets, particularly China and India) is now considered basic common sense. Yesterday Morgan Stanley announced that it revised its expectation for the Brazilian GDP from -4.5% to just -1% for 2009. For 2010, Morgan Stanley revised its estimate from +0.5% to +2.5%. We believe the new numbers are a better portrait of the current economic situation in Brazil.

We continue to favor companies with strong exposure to the Brazilian domestic market. We like Vivo (VIV) (Analyst Report), Cemig (CIG) (Analyst Report), Sabesp (SBS) (Analyst Report) and Coca-Cola Andina (AKO.A) (Analyst Report).

Comments

[Mad Hedge F...:]

I love this country. I ran into a couple of geologists from the Brazilian oil company Petrobras (PBR) who knocked my socks off when they told me about the quality of the crude they were pulling out of their new deep offshore Tupi field. They are drilling at 20,000 feet and getting 15,000 barrels a day of hot, light sweet crude blasting back in their faces under its own pressure; the kind of premium crude you normally only find in the Middle East. Overall, the company plans to boost production from 2.4 million barrels/day today to 3.6 million in five years and 5.7 million in ten years, or half of Saudi Arabia’s current production. I was unable to pin them down on the true cost of the offshore production, meekly claiming they didn’t break the figures out separately. They did admit, begrudgingly, that it is well below $40/barrel compared to the $80 offered by some industry analysts, and $9.20 for the company’s own weighted average cost. This confirms my belief that the next move in crude is up to $200, and then down to $10, as it is replaced by alternatives over time. Be sure to own PBR on the up leg.

Jun 17 05:16 PM

[Jasper M:]

Beware. Brazil is, essentially, a resource play. Ask yourself, would Morgan Stanley have reassessed its predictions of Brazil beFore oil got back over $70 a barrel?
Then ask yourself, just how durable can the current demand (and thus price) for oil be in the monolithic collapse of money supply that characterizes a depression? Ditto any other commodity that Brazil produces.
I suspect Brazilian stocks will trade as more volatile proxies of their American counterparts.

Jun 17 10:59 PM

[Mad Hedge F...:]

yop Hoping to beat the rush, I ordered my Rosetta Stone Portuguese language program last week, fully expecting Rio de Janeiro to win the 2016 Olympics bid. Pick pockets of the favellas of Latin America’s largest city were ebullient. A cheer even went up on the floor of Chicago’s CME, now that the denizens of the Windy City are dodging a monster tax bill. Of course, Obama was in a no win situation, with mud on his face for his failed pitch, and blamed for defeat if he didn’t go. There was never any doubt that the home of the string bikini and the banana thong was going to win. In order to justify the gargantuan cost of the modern games, the International Olympic Committee long ago turned this into an emerging market development program. The great news for investors is that corresponding emerging stock markets have a history of tenfold returns going into the games. Look at South Korea and China. Only the 2004 Athens games were a bust, the home of the Olympics building a games that were far more than it could afford. I have long been a fan of the country that is doing everything right, with a perfect demographic pyramid and a liberal pro business government fueled by resource and energy exports. I managed to catch a 270% leap for my subscribers in the ETF (EWZ) this year. I wouldn’t’ rush out tomorrow and buy on the news, as an impending global stock market selloff is likely to pull it down with everything else. But it definitely should be at the top of your “buy on dips” list.

Oct 04 05:35 AM