Conclusion: The Brazilian economy remains in the sweet spot for equity investments and we continue to hold a bullish bias towards Brazilian equities for the intermediate term. Elsewhere, the fundamentals continue to suggest that King Dollar will appreciate versus LatAm currencies over the intermediate term TREND.
No Virtual Portfolio positions in Latin America currently.
All % moves week-over-week unless otherwise specified. As of Friday’s closing prices.
- EQUITIES Median: +2.8%; High: Brazil +5.4%; Low: Chile +1.7%; Callout: Brazil closed last week up +9.8% for the YTD vs. a regional median of +6.9%
- FX (vs. USD) Median: +1.2%; High: Mexican peso +3.2%; Low: Argentine peso -0.3%; Callout: Peru’s Nuevo sol is the only LatAm currency that has appreciated vs. the USD over the last six months (+1.7%)
- S/T SOVEREIGN DEBT (2YR) High: Colombia -3bps; Low: Brazil -16bps; Callout: Colombian 2yr yields up +116bps in the LTM vs. down -235bps for Brazil
- L/T SOVEREIGN DEBT (10YR) High: Colombia +1bps; Low: Mexico -25bps; Callout: Mexican 10yr yields down -46bps over the last month vs. up +24bps for Brazil
- SOVEREIGN YIELD SPREADS (10s-2s) High: Brazil +10bps; Low: Mexico -15bps; Callout: Brazil up +37bps over the past three months vs. down -48bps for Mexico
- 5YR CDS Median: -2%; High: Peru -0.9%; Low: Argentina -9.7%; Callout: Peru up +9.8% over the last three months vs. a regional median of -3.2%
- 1YR O/S INTEREST RATE SWAPS Median: -0.9%; High: Chile +0.7%; Low: Brazil -1.9%; Callout: Brazil down -6.3% over the last three months vs. a regional median of +2.5%
- O/N INTERBANK RATES Median: -0.3%; High: Chile +1.2%; Low: Brazil -4.6%; Callout: Brazil down -15.1% over the last six month vs. a regional median of -2.2%
- CORRELATION RISK Brazil’s Bovespa Index is becoming increasingly correlated with the S&P 500: +97% over the last three weeks vs. +72% over the last three months.
Full price and performance tables can be found at the conclusion of this note.
CHARTS OF THE WEEK
Brazil’s central bank lowered the country’s benchmark interest rate -50bps for the fourth consecutive meeting. The rate, now at a 18-month low, is now much closer to market expectations for Brazilian monetary policy:
Based on our propriety G.I.D.P. analysis, the Brazilian economy remains in the sweet spot for equity investments:
Moreover, the outlook for Brazil’s growth, inflation, policy, and equity market beta that we published at the top of our 9/1/11 note titled: “Eye On Brazilian Policy: Oh No You Didn’t” continues to play out in spades: “We view the central bank’s aggressive and proactive rate cut as supportive of Brazilian equities because it will likely coincide with a peaking of CPI and a deceleration in Brazil’s current economic slowdown. Our quant models aren’t in full confirmation of this, however, which suggests the turn is likely further out in duration.” Aside from TIME, the only difference between then and now is that the Bovespa’s quantitative setup is in full support of our bullish bias on Brazilian equities:
Growth Slowing’s Bottom:
- Mexico: Unemployment Rate ticked down in DEC to 4.5% vs. 5%; ANTAD Same-Store Sales growth slowed in DEC to +3.8% YoY vs. +14.6%.
- Peru: Unemployment Rate held flat in DEC at 7%.
- Brazil: For the fourth time since AUG, Tombini & Co. lowered the country’s Benchmark Interest Rate by -50bps, taking the Selic to 10.5%, which is the lowest since 3Q10. The latter point suggests to us that the QE2-inspired rate hike cycle has been completely reversed in Brazil, which is bullish, on the margin, for perception of Brazil’s intermediate-term growth prospects. Looking forward, Brazil should remain in quadrant #4 of our GIDA chart (see above) through Q1, suggesting further easing is likely. We received confirmation of this over the weekend, as O Globo reported that Rousseff is prepared to make fiscal adjustments to help the central bank cut the [Selic] by at least a another percentage point in 2012.
- Brazil: In addition to the currency headwind that is monetary easing, Brazil’s government is reported to be studying ways to stem the recent rally in the real. The inflection in USD-denominated loan rates (+14bps since Wed) suggests that the central bank may be hinting at additional dollar purchases.
- Mexico: Despite three consecutive months of acceleration in CPI to a mere 20bps shy of their upside inflation target, the central bank kept the country’s Benchmark Interest Rate at a record-low of 4.5% for the 24th-consecutive meeting. In fact, the monetary policy board led by Governor Agustin Carstens tilted their commentary to the dovish side, signaling that: a) their policy is consistent with their outlook for inflation; and b) that they stand ready to lower rates should growth come in to the downside.
- Argentina: Argentina’s Benchmark ARS Deposit Rate continues to make new intermediate-term lows, touching 15.6% today (down from a peak of 22.9% in mid-NOV). The trend is proof that President Fernandez was successful (over the short term) in her bid to slow capital outflows by increasing the supply of pesos in the economy by imposing USD scarcity via a series of repressive regulations. This does not include the latest scheme, which will force importers to require gov’t approval for all overseas purchases after FEB 1. The change is likely to limit imports on the margin in order to support the trade balance; that may ultimately serve to push up Argentine CPI as certain products become more scarce and/or more expensive to produce.
- Argentina: The peso’s -6.5% YTD slide vs. the Brazilian real has been supportive of Argentina’s USD-denominated sovereign debt, with yields falling -61bps to 10.7% (through JAN 18). This is because increased competiveness w/ Brazil, Argentina’s largest trade partner, is supportive for growth in the country’s FX reserves, which Argentina uses to service its USD debt burden.
- Argentina: The latest news surrounding Argentina’s sovereign default/bankruptcy proceedings takes us to D.C., where the Supreme Court asked the Obama administration for advice on whether it should hear an appeal from the hedge funds EM Ltd. and NML Capital (both units of Elliot Management Corp.). Having turned down both of Argentina’s restructuring attempts (2005 and 2010), the creditors claim they are owed at least $2B in principal and interest payments. The Supreme Court is specifically debating whether or not to rule on the funds’ failed attempt at seizing $100M in Argentine assets being held in custody of the Federal Reserve. A ruling in favor of the funds may set precedent for increased legal recourse for investors in the event of sovereign defaults – a very apropos subject given the current issues in Europe.
MOSHE’S BRAZIL NUGGETS
Moshe Silver, our Chief Compliance Officer, is fluent in Portuguese and mines the local Brazilian press for hard-to-get data points for us each day. Below, we flag his top three callouts from the previous week:
- Brazil’s national labeling program is urging consumers to trade in their low-efficiency appliances and lighting fixtures for those labeled “A”, which represents the highest level of quality and energy efficiency. A concerted marketing effort plus any new rebate program are likely to be a tailwind for Brazilian retail sales over the intermediate term.
- According to Valor, the $3.5B of foreign investor inflows into the Bovespa in the YTD (through first 12 trading days of 2012) is the highest in at least seven years.
- Brazilian leadership continues to demand more say in how IMF funds are allocated in exchange for its continued financial support.
THE WEEK AHEAD
Key economic data releases and policy announcements:
- TUES: Brazil: mid-month CPI (IPCA-15); Mexico: Global Economic Indicator; Argentina: Industrial Production, Consumer Confidence, and Shop Center Sales
- WED: Brazil: FGV Consumer Confidence; Argentina: Supermarket Sales
- THURS: Brazil: Central Bank Monetary Policy Meeting Minutes and Unemployment Rate; Mexico: Retail Sales and Presidential Election Poll (Consulta Mitofsky)
- FRI: Brazil: Aggregate Credit; Chile: Central Bank Monetary Policy Meeting Minutes
- MON: Brazil: FGV CPI (IGP-M); Chile: Industrial Production and Retail Sales