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Volatility has returned to Brazil. Through much of last year and the first weeks of 2010, the nation’s benchmark Bolsa de Valores, Mercadorias e Futuros Bovespa index seemed capable of going in only one direction — up — but financial crises half a world away have reminded investors that what goes up can and often does come down.

The turbulence makes little sense in light of the fact that Brazil is less affected by external factors than ever, owing to robust domestic growth. “The most important highlight from this period is the continuous outperformance of consumer-­related stocks over the commodity producers,” explains Carlos Constantini, head of research at Itaú Securities in São Paulo.

“The second half of 2009 was wonderful — the market was on a nonstop tear,” adds Rodrigo Góes, co-head of research at BTG Pactual in São Paulo.

The Bovespa index hit 70,451.11 in January, a gain of 72.6 percent over one year earlier, then plunged to 62,762.70 the following month amid investor concerns that the debt crisis in Dubai and speculation of an even more serious situation in Greece would set back the world’s faltering economic recovery. Once it became apparent that those two crises could be contained, investors returned to Brazilian equities and sent the Bovespa soaring to 71,784.78 in April.

The rally didn’t last long. That month, China — one of Brazil’s primary trading partners — announced that it was curtailing its stimulus spending in an effort to cool its own overheated market; skittish investors, concerned about the impact a downturn in China would have on Brazil, abandoned Brazilian equities in search of safer havens. By May the index had plunged to 58,192.08.

“The Bovespa has recovered a bit, but volatility has been the norm and probably will continue to be,” Góes explains. “The fundamentals of the Brazilian economy are solid and would probably warrant higher valuations for the Bovespa, but the shaky global economic environment has been preventing it from performing better.”

Trying to make sense of the these wild gyrations has been challenging. Money managers need insight into the market’s mood swings, and investors say no firm does a better job of providing the type of research they deem essential than Itaú Securities, which leads the 2010 All-­Brazil Research Team, Institutional Investor’s seventh annual ranking of the nation’s top equity and fixed-­income analysts. Itaú, which captured second place last year, wins 14 total team positions, four more than in 2009.

Two firms tie for the No. 2 spot: BTG Pactual, the outfit that was created last September when Rio de Janeiro–based asset management firm BTG Investments bought last year’s top-­ranked UBS Pactual, and Credit Suisse, which jumps from No. 4. The firms claim 12 team positions each, up from 11 and nine, respectively.

J.P. Morgan nearly doubles the number of its positions, from five to nine, and in so doing rises two rungs, to fourth. Rounding out the top five is BofA Merrill Lynch Global Research, which falls from No. 2; the firm wins eight positions, down from ten in 2009. Results are based on responses from more than 400 asset managers at some 250 institutions, domestic and foreign, managing $240 billion in Brazilian equities and $72 billion in Brazilian debt.

The volatility in Brazil’s stock market is echoed in investment research operations, with wild fluctuations in the number of analysts employed and companies covered. Itaú has 30 analysts covering Brazil, six fewer than last year after the firm reassigned some researchers to other Latin American markets; even so, the number of Brazilian stocks Itaú analysts track increased, from 125 to 129, Constantini says.

BTG Pactual added ten researchers to the 18 it acquired from UBS and increased its coverage universe from 68 companies to 107. “When BTG took us over, they gave us a generous budget to find the best people,” says Góes, who is the top-­ranked analyst in Aerospace, Transportation & Industrials for a sixth consecutive year. (Analysts ranked No. 1 in their respective sectors are listed and the complete list of winning analysts, including those ranked second, third and runner-up, click here.) “We added head count to every single sector and are still expanding. We plan to add another 25 stocks to our coverage universe by year-end.”

Credit Suisse kept its research operations stable, with 21 analysts tracking about 110 companies. “We have maintained a steady commitment in spite of volatile market conditions,” explains São Paulo–based Emerson Leite, co-head of Latin American equity research at Credit Suisse; he’s also ranked third in Chemicals & Oil. When the market turbulence subsides, Leite says, the Swiss bank will begin adding analysts.

J.P. Morgan picked up three analysts, bringing its total to 25; they cover 95 stocks, up from 85, according to Ben Laidler, the firm’s New York–based head of Latin American equity research: “We wanted to be closer to companies and clients, to provide a more comprehensive local view to go with our global strengths.”

One of those strengths is analyst Saul Martinez, who vaults from runner-up to capture the top spot for the first time in Banking & Financial Ser­vices. Backers single out Martinez’s coverage of Itaú Unibanco Holding for special praise. The 36-year-old, New York–based analyst upgraded both the preferred shares and the American depositary receipts from neutral to overweight on a dip in May, at 32.85 reais and $17.56, respectively, after Bank of America Corp. announced that it would sell its stake in the São Paulo–based institution.

“We felt that investors had the opportunity to buy a best-in-class bank with above-­peer profitability levels and a solid growth outlook at a very reasonable valuation,” Martinez says. Since the upgrade the stock leapt 20.5 percent, to R39.59, and the ADRs jumped 27.5 percent, to $22.39, through July. During the same period the Bovespa index rose 16 percent and the Standard & Poor’s 500 index inched up only 2.8 percent.

Martinez, who earned a master’s degree at Princeton University’s Woodrow Wilson School of Public and International Affairs in 1998, joined J.P. Morgan in New York as a banks analyst that same year. He moved to Bear, Stearns & Co. in 2000 to cover Latin American financial institutions. When JPMorgan Chase & Co. acquired Bear ­Stearns Cos. in June 2008, Martinez found himself back at the firm where he began his career.

Another analyst at No. 1 for the first time is Paula Kovarsky; the Itaú researcher rises from second place to rule the roost in Chemicals & Oil. Kovarsky, 36, who is headquartered in São Paulo, knows the industry well: After earning a bachelor’s degree in mechanical engineering at Pontifícia Universidade Católica do Rio de Janeiro in 1996, she worked as a mergers and acquisitions specialist in the business development office of Royal Dutch Shell for ten years.

In January, Kovarsky advised clients that São Paulo–based petro­chemicals giant Braskem’s plan to acquire rival Quattor Petroquímica would likely be an expensive venture. Even though state-run Petróleo Brasileiro (better known as Petrobras), which owned a 40 percent stake in Quattor, had agreed to contribute a massive amount of cash to equalize the capital structure, Kovarsky wasn’t impressed. She broke with the consensus and reiterated her neutral rating on Braskem, at R13.61.

“They all bet on a free lunch to be paid by Petrobras,” Kovarsky says. “Braskem paid a high price for Quattor, and after the acquisition shares underperformed the Bovespa by 10 percent.” In June, after the euphoria died down, Kovarsky switched directions and upgraded the company to outperform, at R11.70, citing cost-­cutting initiatives and operational improvements at Quattor. By late July the stock had bubbled up 12.9 percent, to R13.21. During the same period the sector slid 4 percent.

Taking a contrarian stance also worked out well for BofA’s Felipe Hirai, a runner-up last year in Natural Resources. This year that sector was divided into Metals & Mining and Pulp & Paper, and Hirai skyrockets to the No. 1 spot in Metals & Mining. The New York–based analyst insisted in July 2009 that the market was underestimating just how high the price of iron ore might go, and he upgraded the ADRs of the world’s largest iron-ore producer, Vale, from neutral to buy.

“The stock was trading at $16.37 and went up 10.4 percent on the day of our upgrade — unusual movement, given Vale’s high liquidity,” says Hirai, 31. By mid-­January the ADRs had shot up to $30.12, but Hirai believed investors were still being overly bearish, so he reiterated his recommendation. “We had an out-of-­consensus call that iron-ore prices were going to increase by 50 percent in 2010, while market consensus was at 20 to 25 percent.”

The price of iron ore sky­rocketed in the second quarter and Vale’s share price rose along with it, peaking at $34.31 in mid-­April before being dragged down by market volatility. The stock closed July at $26.94, gaining a whopping 64.6 percent since the first upgrade. Hirai, who earned a bachelor’s degree in business at São Paulo’s Fundação Getulio Vargas in 2001, joined Merrill in 2006 after working as a metals and mining analyst at Hedging-­Griffo, an asset management firm headquartered in São Paulo that was later acquired by Credit Suisse.

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