Q15 How Many Units Are In Classified As On-Order Stock What More Interest Rate Cuts Will Mean for Investors in Brazil

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What More Interest Rate Cuts Will Mean for Investors in Brazil

Today economists covering Brazil cut their 2011 growth forecast for a fifth straight week to 3.2% from 3.29% and held their 2012 growth estimate at 3.5%. Economists also cut their inflation forecast in 2012 to 5.57% from 5.59%. With this change in forecasted growth and inflation the yields on Brazilian interest rate futures declined as the market priced in an increased chance that the government will act to counter any slowdown with another cut to the benchmark Selic rate.

As the macro-economic situation worsens with the debt crisis in Europe and economic stagnation in the US, Brazil’s economy should continue to feel negative external forces and the government will be forced to make internal changes, with rate cuts, in order to combat this. Below we take a quick look at what the effects of a possible interest rate cut will have by examining a selected group of Brazilian industries and asset types

Bond investors should move more into stocks as bond yields will drop and companies should feel the positive effects of a rate decrease. However, Brazilian bond yields are still at very high levels compared to the rest of the world and with Brazil’s excellent credit rating you may not see a flood of money leave the bond market as yields decline.

The Real should decline as a lower yield on government bonds makes the currency less attractive. As we saw last month when the government made the surprise rate cut announcement the Real experienced a dramatic sell off losing 14% in one week. Although it did return to recoup some of its losses investors were quick to turn away from the currency as bond yields declined.

Bank stocks in a declining interest rate environment should expect to see profits decline as yields on loans charged to customers should drop. However, for Brazilian banks a declining interest rate may actually help increase profits as a lower interest rate will help struggling consumers make their payments and reduce the amount of delinquent loans for the banks. In its latest earnings release Banco Itau noted that a decrease in interest rates could help increase profits 15% next year due to less loan write offs. Expect this decrease in delinquencies to also positively affect Retailers who have consumer loan units, such as Pao de Acucar.

Real Estate companies should also feel positive effects from a rate decrease as borrowing costs will be reduced for potential home buyers and property developers. Today the BM&F Bovespa Real Estate index rose to a one week high as yields on interest rate futures declined.

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