The Brazilian stock exchange, the Bovespa, is enjoying a boom as domestic and foreign investors bet that economic growth, higher employment and household income, easy access to credit, plus the increasing demand for Brazilian commodities abroad will boost company earnings. The Ibovespa index has risen by around 175% on an accumulated basis since 2003. Most observers expect it to continue to power ahead in 2007. In this interview, Reginaldo Alexandre, the vice president of the Association of Capital Market Analysts and Investment Professionals, APIMEC, talks about the prospects for this year and the growing interest by foreign investors which has led the ADRs of Brazilian companies to be the most traded on the New York Stock Exchange. He also mentions the importance of the Novo Mercado, which emphasizes better corporate governance practices, and the sectors he favors at the moment.

Reginaldo Alexandre: The market has actually been rising since October 2002. Although the Ibovespa ended at a negative level that year, it rose by 97% in 2003, 17% in 2004, 28% in 2005 and 33% last year. There are various reasons for this development. The world economy has been growing at around 5% to 6% a year - in both developed and developing countries. The external environment has been extremely favorable, leading to lots of liquidity and investors looking for returns in emerging economies. At the same time, countries like China and India are making great strides forward and industrializing in a way that is similar to what happened at the beginning of the last century. This is bringing long cycles of growth and reminds me a little of the period just after the Second World War.

Alexandre: Brazil is benefiting not only from this external liquidity but also from the greater availability of credit on the domestic market. One of the reasons why the stock market took off at the end of 2002 was because it became easier to obtain credit. The rise in prices of commodities like steel and iron ore has also helped companies in those areas and led to big trade surpluses. This has pushed up the Real against the dollar and, although this has had a downside effect in some industries, the overall effect has been good. On the macroeconomic level the monetary policy has been successful and the fiscal surpluses are higher than we have seen for many years. Employment rates and personal income are increasing. So this combination of the right monetary policy and greater credit and fiscal responsibility at home, a growing economy abroad and higher commodity prices is boosting company earnings and economic growth. Brazil may not be growing as fast as places like India or China or even Argentina but slow, steady growth is preferable to fast but volatile growth.     

Alexander: Yes. I tend to be pretty cautious and am projecting that the Ibovespa will end this year at around 53,000 points – 19% higher than at the end of 2006. Many analysts are more optimistic and some are even forecasting that it will go up to 60,000 points. There are still good investment opportunities, as the Bovespa is still trading at a discount to other Latin American markets and other emerging countries. I am expecting company earnings to continue growing at rates of 15% to 18%.

Alexandre: It´s very positive. It shows the improvement in the risk perception of the country and that foreign investors believe the economy is in a condition to grow. The Brazilian capital markets are very organized and regulated and corporate governance has improved enormously. Most of the shares of companies listed on the Novo Mercado, which has higher levels of corporate governance, are held by foreigners. As for Petrobras, it is the most traded ADR on the New York stock exchange. In fact, Brazilian ADRs are now the most traded of all ADRs in New York. Two years ago Brazilian ADRs came fourth but they have risen in the ranking. Between January and October 2006, a volume of US$214.9 million in Brazilian ADRs was traded compared with US$195.4 for UK companies and R$106.360 for Chinese companies. By comparison, Japanese ADRs were in ninth place. That´s a pretty impressive achievement. 

You mentioned the Novo Mercado which has only been operating since 2001. It now has 103 listed companies and many others lined up to join. How would you judge its performance so far?

Alexandre: It has been highly successful and has attracted a large number of companies and investors, thanks to its policy of transparency which protects shareholders. For example, on top of granting tag-along rights in the case of selling the enterprise, among other rights, companies listed on the Novo Mercado must hold at least one public meeting a year. This means they have to face questions in public from analysts who then make their recommendations to investors. What is particularly heartening about the Novo Mercado is that it was an initiative which came entirely from private entities. It had the backing of the CVM, the Central Bank and the BNDES but was a private initiative and had nothing to do with the government.        

Alexandre: Insider trading is regrettable but it happens everywhere. In the two latest cases, involving Sadia and Ipiranga, the Brazilian Securities and Exchange Commission, the CVM, has acted quickly. The cases are being investigated according to the regulations and this shows investors that insider trading is treated seriously in Brazil.

Alexandre: The domestic growth, higher income and falling interest rates are boosting consumption and lead me to favor the food, beverages and retail sectors. The expected growth should also be good for the electrical energy sector, particularly generating companies, and companies involved in infrastructure. The demand for commodities favors areas like iron or and steel. Sectors which are not in such a strong position are those which face strong competition and have their costs in Reais, such as textiles and shoes. These are losing markets abroad and being hit by imports due to the exchange rate.

Alexandre: APIMEC is a channel between companies and analysts. We have meetings and presentations at which analysts have the option to questions companies in detail. It is completely independent and our 2,000 members, including all our branches in Brazil, are all individuals. We do not have corporate membership.

© John Fitzpatrick 2007