BRADESCO BBI Equity Research
Divergent Drivers, Sideways Market
For the short term, we believe the markets are more likely to remain sideways. Most of August’s negative performance attributed to the surprising weakness displayed by the US, increasing the chances of a new recession appearing on the horizon. We still see reason for concern about Europe in the coming months, with discussions on 2011 budgets and refinancing requirements for sovereign bonds. However, we are not betting on a new round of stress coming from this source, as the European Central Bank has the firepower to support countries in the near term. Meanwhile, we have a neutral view on China, not seeing it as a major source of stress for the markets since the government still has the option of removing tightening measures in the event of deceleration. The US, for its part, seems to be the major driver for the market, but even though we see risks of further signs of deceleration, it is tough to bet against the market in the short term since the Fed should provide more liquidity to the market if necessary.
For the local market, a potential rotation of portfolios with the Petrobras offer should dominate the scene in September. Besides this major event, we do not view economics or politics as drivers. Currently, the most likely scenario for the presidential race is a victory by Dilma Rousseff, potentially in the first round, and we believe the market has already priced in this hypothesis, for the most part. We expect Ms. Rousseff to have a pragmatic approach, focusing on improving fiscal accounts in the first years of her administration.
In our portfolio for September, we have made four changes. We are including Gol (GOLL4), Light (LIGT3), Lupatech (LUPA3) and Pão de Açúcar (PCAR5), and removing Amil (AMIL3), BR Properties (BRPR3), Gerdau (GGBR4) and Lojas Americanas (LAME4).
Our 10-stock focus list for August was up 1.9%, compared to -3.5% for the Ibovespa and -4.0% for the IBX-50. YTD in 2010, our portfolio’s compounded return was +13.0%, compared to -5.0% for the Ibovespa and -7.1% for the IBX-50. The main highlights of our portfolio for August were Tegma (+23.0%), OGX (+12.3%) and Amil (+6.1%), while the losers were Banco Panamericano (-12.9%), Gerdau (-7.5%) and Vale (-2.9%).
Head of Equity Research