Before being shaken by the reverberations of the worldwide credit crunch, Brazil's capital markets were on track for a fourth straight year of double-digit gains. The Bolsa de Valores de São Paulo, or Bovespa, index advanced 32.9 percent in 2006 and a further 28.1 percent by July before tumbling; as of mid-August the Bovespa had been pared back to a gain of 8.6 percent for the year.
Like many emerging markets, Brazil is showing newfound resilience. One reason is that demand for Brazilian equities is no longer being driven primarily by foreign investors. "Local investors are moving their asset allocations away from debt to equities as a result of lower interest rates," explains Pedro Martins Jr., the São Paulobased director of research for Merrill Lynch, who estimates that his client mix is now equally divided between domestic and international investors. These domestic investors are "extending their investment horizons and seeking stocks that produce sustainable earnings growth," Martins says.
Supply is growing to meet local demand. Brazil had 21 initial public offerings this year through mid-August, according to Standard & Poor's, compared with the 26 that were launched in all of last year. "As local consumers' spending power increases, more and more companies are coming to market," explains New Yorkbased Rizwan Ali, who since May has been the head of Latin American company research for Deutsche Bank Securities.
To keep up with this surge and to make sense of Brazil's increasingly complex economic environment, investors rely on brokerage firms to provide timely, insightful research. No one does a better job than UBS Pactual, according to participants in Institutional Investor's fourth-annual All-Brazil Research Team survey. The firm, created last December after Swiss banking giant UBS acquired Rio de Janeirobased Banco Pactual, wins 13 total team positions, one fewer than the pair earned individually last year (top-ranked Banco Pactual had eight total team positions, and second-ranked UBS had six). Credit Suisse, which rises from third place to second, captures ten total team positions -- twice as many as it did last year. Rounding out the top five are Itaú Corretora de Valores and Merrill Lynch, in a tie for third (last year they tied for fourth), and Bear, Stearns & Co., which rises from ninth place to tie for fifth with Unibanco Investshop Corretora de Valores Mobiliarios and with Deutsche Bank, last year's No. 6 and No. 8, respectively. Results are based on responses from representatives of more than 170 institutions, domestic and foreign, managing some $79 billion in Brazilian equities and more than $99 billion in Brazilian debt.
UBS Pactual has also seen a strong rise in the number of domestic clients. Research director Pedro Batista, who is this year's top-ranked analyst in both Electric & Other Utilities and Equity Strategy, estimates that 40 percent of the firm's clients are local, up from 30 percent a year ago. "Over the past year -- reflecting the strong inflows into equity funds as investors have been reducing their exposure to fixed income because of low interest rates and the creation of new funds -- the number of local clients has been increasing significantly," says Batista, who is based in Rio de Janeiro.
Batista replaces UBS's former head of research, Marcelo Mesquita, who is now co-head of UBS Corretora de Câmbio e Valores Mobiliários brokerage, and Banco Pactual's former head of research, Ricardo Kobayashi, who moved to UBS Pactual Asset Management. Other researchers changed sectors after the merger. Gustavo Gattass, who covered Electric & Other Utilities for UBS, now covers Chemicals & Oil (he finishes No. 1). Jander Silveira Medeiros, a transportation analyst for Banco Pactual who was on the second team last year in Aerospace, Transportation & Industrials, switched to retail analyst and finishes first in Consumer Goods. He initiated coverage of Dufry South America with a buy recommendation in January, weeks after its market debut, tapping his airline knowledge to reason that as Brazil's growing middle class become more-frequent fliers, it would drive business for the duty-free-imports chain. By mid-August Dufry's shares had soared 68.9 percent. "I'll follow his coverage wherever it goes," says one longtime client of Medeiros's.
In addition to reassigning analysts to avoid duplication of effort after the merger, Batista has hired three new researchers, for a total of 31, and plans to hire more, given the strength of the IPO market. "We cover more midcaps than before, in part because there are so many newly listed companies," Batista says, adding that he does not think the recent market turmoil will slow the pace of companies going public. "After the reduction in market volatility following the recent market downturn, companies should continue with their IPO processes, but investors should be more selective going forward," he says. UBS Pactual researchers follow 89 companies and will track 120 by the end of the year, he adds.
Second-place Credit Suisse is also covering more companies -- 85, up from 66 one year ago, according to co-directors of research Roberto Attuch, who is on the second team in Banking & Financial Services and the third team in Equity Strategy, and Emerson Leite, who ranks second in Chemicals & Oil and third in Electric & Other Utilities. The firm hired three analysts in the past year, for a total of 15. "We've added coverage of real estate, metals and mining, agribusiness and infrastructure," says the São Paulobased Attuch, citing high commodities prices and low interest rates as key reasons for growth in those sectors.
Itaú Corretora de Valores, in third place, has been expanding even more aggressively. The firm, which added six senior researchers, is now 19 analysts strong and tracks 70 companies, 22 more than last year. "This expansion is aimed at keeping up with the increasing number of companies that are enjoying far greater access to capital than ever before," says Eduardo Sancovsky, the firm's São Paulobased director of research. Merrill Lynch, which ties for third, added six researchers and plans to hire more to "enhance our coverage of existing sectors after the intense IPO activity and to add new sectors such as education," says Martins, who is on the second team in Equity Strategy. The firm currently covers 66 stocks, up from 43.
Brazil's strong IPO market prompted fifth-place Deutsche Bank to hire a small-cap analyst, bringing the research department's head count to 15 and the number of companies it follows to 54, up from 41 last year. "With the spate of IPOs, there are a number of small companies that sector analysts may not be able to focus on, and those companies are better covered by small-/midcap analysts," says research chief Ali. He plans to continue adding analysts in the coming year, particularly in the consumer sector. "Brazil is at the forefront of developing renewable energy sources," he says. "That's another sector where we're looking to add people."
With Brazilian capital markets drawing so much attention -- and money -- it's not surprising that even those firms that until now chose the Mexican market as a primary area of emphasis for Latin America are having second thoughts. Citi Investment Research, which finishes in the top ten for the first time, has beefed up its Brazil effort of late. Under the direction of Geoffrey Dennis, Citi added three analysts to its Brazil team over the past year and now tracks 58 companies, more than double the 27 covered one year ago. The New Yorkbased chief equity strategist for Latin America hopes to add one or two more researchers by year-end. "We're not going to go crazy and add tons of people, but we're still in expansion mode," Dennis says. "There are so many IPOs coming out of Brazil right now that we will probably need to add somebody to respond to those, whatever sector they appear in."
Contributing Editor Mattlin and Contributors Scott Martin and Henry Stokes wrote the sector reports.
The Best Analysts of the Year
AEROSPACE, TRANSPORTATION & INDUSTRIALS
Luiz Otávio Campos Credit Suisse
Stephen Trent Citi
Sara Delfim Bear Stearns; Daniel McGoey Deutsche
Business has been booming for Brazil's air carriers, whose passenger volume climbed 17 percent in 2006. Even so, supply has outstripped demand, prompting three-time category champion Rodrigo Goes, 34, of UBS Pactual to make what one investor describes as a "spectacularly contrarian call in a crowd of otherwise happy talk." Goes warned last December that earnings momentum was stalling for market leaders Tam Linhas Aéreas and Gol Linhas Aéreas Inteligentes. The São Paulobased analyst downgraded the stocks to hold and sell, respectively. By mid-August the shares had fallen 29.0 and 30.1 percent. During the same period the benchmark Bolsa de Valores de São Paulo, or Bovespa, index advanced 13.3 percent. Credit Suisse analyst Luiz Otávio Campos, who rises one notch to second place, wins praise for "digging deeper to find undiscovered names," says one money manager. In May 2006 the São Paulobased analyst recommended toll-road operator Cia. de Concessões Rodoviárias, at 16.28 reais ($8.39), on rising revenues. By mid-August 2007 the shares had jumped 101.5 percent. Stephen Trent debuts in third place. Based in New York, the Citi Investment Research analyst reasoned in January that struggling second-tier carriers such as Varig Brazilian Airlines were likely takeover targets. In April, Gol acquired Varig for $282.5 million.
BANKING & FINANCIAL SERVICES
Roberto Attuch Credit Suisse
Mario Pierry Deutsche
Carlos Firetti Bradesco; Carlos Grein Macedo Unibanco
Leaping two places to capture the No. 1 spot for the first time, Bruno Pereira at UBS Pactual provides what one money manager calls a "refreshingly deep approach" to Brazil's banking sector. In June 2006 the Rio de Janeirobased analyst upgraded Banco Itaú Holding Financeira, believing it was undervalued. By mid-August 2007 the stock was up 25.1 percent. Pereira, 34, who earned a degree in mechanical engineering from Rio de Janeiro's Universidade Federal Fluminense in 1997, joined UBS in 2000 after working as a financial services analyst for Banco Itaú. Slipping to second after three years on top is Roberto Attuch of Credit Suisse. Investors praise the São Paulo based analyst, who also is No. 3 in Equity Strategy, for his "fine handling of day-to-day targets on the big names," as one puts it, and single out his December 2006 buy on Porto Seguro, Brazil's biggest car insurance company, on rising profitability. The stock climbed 17.0 percent by mid-June before settling back through mid-August. Debuting in third is New Yorkbased Deutsche Bank analyst Mario Pierry. "His timing is really spectacular," notes one client, citing an August 2006 counterconsensus buy on Banco do Brasil. Pierry thought other analysts were overreacting to concerns about the consumer bank's farm loan portfolio; one year later the stock was up 61.1 percent.
CHEMICALS & OIL
Emerson Leite Credit Suisse
Gilberto Pereira de Souza BES
Christian Audi Santander
Gustavo Gattass of UBS Pactual vaults from runner-up to first team. The São Paulobased analyst "takes great pains to avoid making a case for a stock if there isn't one there," says one client. Gattass did make a case for liquefied petroleum gas distributor Ultrapar Participações last November, citing its strong growth potential. By mid-August the shares had heated up 39.1 percent, while the MSCI Brazil chemicals index advanced only 6.7 percent. Gattass, 32, joined UBS in 1997 after earning an economics degree from the Pontifícia Universidade Católica do Rio de Janeiro. After three years at No. 1, Emerson Leite of Credit Suisse falls to No. 2, but he continues to provide what one investor calls "an astute regional perspective." Based in São Paulo, Leite, who also is No. 3 in Electric & Other Utilities, told investors last December to buy natural-gas distributor Cia. de Gás de São Paulo, reasoning that fears of a disruption in supplies from Bolivia were overstated. By May, when he downgraded to neutral, Comgas shares had risen 41.4 percent. Down a notch to third, Gilberto Pereira de Souza of Banco Espírito Santo Securities is "the master of tracking margins," says one client. In February the São Paulobased analyst reaffirmed his long-standing buy on polyethylene manufacturer Suzano Petroquímica, which was acquired by Petrobrás in August. Shares have shot up 120.6 percent since Pereira's call.
Jander Silveira Medeiros
Guilherme Arruda UBS Pactual
Juliana Rozenbaum Unibanco
Tufic Salem Credit Suisse
Jander Silveira Medeiros, 30, claims the top spot in his first year covering Consumer Goods. The former transportation analyst "knows that every company is a unique story," observes one investor. In January the Rio de Janeirobased researcher initiated coverage of Dufry South America, reasoning that increasing air travel would drive growth for the duty-free-imports chain. By mid-August Dufry's shares had jumped 68.9 percent, while MSCI's Brazil consumer staples index rose only 4.1 percent. Medeiros, who earned a degree in mechanical engineering from Universidade Estadual de Campinas in 1999, was a buy-side analyst for several firms before joining Pactual in 2005. His colleague Guilherme Arruda debuts in second. "Guilherme comes right to the point," says one client, citing an April note that meat exporter Perdigão was undervalued at R27.98. In July, with the share price up 33.6 percent, he urged investors to take profits. Juliana Rozenbaum, who moved from Deutsche Bank to Unibanco in June, drops two spots to third, but loyalists say her sector knowledge remains "outstanding." Rozenbaum is still bullish on long-standing favorite Cia. de Bebidas das Américas, a soft-drink manufacturer, which was up 58.7 percent for the 12 months ended mid-August.
ELECTRIC & OTHER UTILITIES
Eduardo Haiama UBS Pactual
Emerson Leite Credit Suisse
Rowe Michels Bear Stearns; Sergio Tamashiro Itaú
UBS Pactual's Pedro Batista finishes on top for the third time in four years. Batista, 32, who is also No. 1 in Equity Strategy, issued a buy recommendation on hydroelectric-power supplier Cia. Energética de São Paulo last September, on rising energy prices. Through mid-August the share price climbed 46.3 percent, while the MSCI Brazil utilities index was up 15.6 percent. Batista's colleague Eduardo Haiama debuts in second. "He knows contract details that are key in such a regulated industry," says one investor. In January 2006 Haiama urged investors to buy Cia. Energética do Ceará, calling the power supplier undervalued at R17.60. In February 2007, with the stock up 56.8 percent, he urged investors to take profits. Emerson Leite of Credit Suisse finishes in third. The São Paulobased analyst, who is also second in Chemicals & Oil, made what one client describes as a "fantastic call" on Cia. de Saneamento Básico do Estado de São Paulo, or Sabesp. Anticipating higher earnings, Leite upgraded the water utility to buy in May. By mid-August the stock had outperformed the sector by 20.5 percent.
Roger Downey Credit Suisse
Marcelo Aguiar Merrill Lynch
Edmo Chagas of UBS Pactual, who rises from runner-up to No. 1, "leads the debate" on mining, according to one client. The Rio de Janeirobased Chagas reiterated his buy recommendation on iron ore producer Cia. Vale do Rio Doce last December, on rising demand. By mid-August shares of CVRD had soared 43.6 percent, outperforming the MSCI Brazil metals and mining index by 7.3 percentage points. Chagas, 35, who earned a bachelor's degree in business at Universidade Federal Fluminense in 1992, worked at Banco Pactual before joining UBS in 2000. Unranked last year, Roger Downey of Credit Suisse claims second place, impressing clients with his work on "some of the biggest projects worldwide," says one admirer. Downey, who is based in São Paulo, urged investors to buy MMX Mineração e Metálicos in September, on surging demand for iron ore. By mid-August the stock had soared 127.2 percent, nearly double the sector's 67.7 percent gain. Marcelo Aguiar, who left Merrill Lynch in July for Goldman, Sachs & Co., returns in third. Also a fan of iron ore, Aguiar put a buy on steel producer Cia. Siderúrgica Nacional in February. By mid-August the share price had risen 32.0 percent, while the sector gained 15.1 percent.
Guilherme Vilazante Castro UBS Pactual
Renata Faber Itaú
For "understanding a variety of sectors," as one backer puts it, Alexandre Falcão premieres at the top. Based in São Paulo, the Merrill Lynch researcher wowed clients last December with his buy rating on auto-parts maker Iochpe-Maxion, at R17.50, reasoning that declining interest rates would spur auto loans and pump up sales. Sure enough, demand surged. By mid-August the shares had zoomed 56.0 percent, to R27.30. Falcão, 28, earned a mechanical engineering degree from Escola Politécnica da Universidade de São Paulo and was a consumer analyst at Itaú Corretora de Valores before joining Merrill last year. A bullish view of homebuilders helps UBS Pactual's Guilherme Vilazante Castro debut in second place. In June 2006 the Rio de Janeirobased analyst urged investors to buy property developer Rossi Residencial, at R15.50. By mid-August 2007 the stock had skyrocketed 156.8 percent, to R39.80. "He's consistently ahead of the curve," cheers one client. Slipping from No. 1, São Paulobased Renata Faber of Itaú Corretora de Valores impressed clients with her November 2006 buy on Lupatech, largely because the manufacturer of specialty valves supplies state-run energy provider Petróleo Brasileiro, which was on the verge of expanding. Lupatech shares jumped 50.0 percent by mid-August.
Andrew Campbell Credit Suisse
Mauricio Fernandes Merrill Lynch
Unranked last year, Carlos Sequeira of UBS Pactual zooms to No. 1. The Rio de Janeirobased analyst, whom one client calls "forceful," upgraded Net Serviços de Comunicação to buy in May 2006, on the pay-TV provider's outlook for growth. By mid-August 2007 the stock had shot up 65.4 percent, while the sector advanced 23.7 percent. Sequeira, 35, earned an MBA from Instituto Brasileiro de Mercado de Capitais in 1999 and worked as a telecommunications analyst for a Brazilian investment bank before joining UBS in 2002. Andrew Campbell of Credit Suisse slips to second but continues to offer "great insight," says one fan. That insight prompted the São Paulo based analyst to recommend Internet service provider Global Village Telecom Holding in March as a high-growth alternative to mature telecoms. By mid-August the stock had outperformed the sector by 23.6 percentage points. Rising from runner-up to third is Merrill Lynch's Mauricio Fernandes, based in São Paulo. "He always comes straight to the point," observes one client. Buy Brasil Telecom Participações, Fernandes said in May, because its operational outlook is improving. The stock jumped 29.3 percent before tumbling in the July sell-off, but Fernandes remains bullish.
For being "independent, thoughtful and reliable," in the words of one client, Ciro Matuo of Itaú Corretora de Valores not only claims the top spot but also is the sole winner in the sector. Matuo, 34, joined the sell side in March 2006 after serving as a utilities analyst in Banco Itaú's asset management division. In June 2006 the São Paulobased analyst recommended América Latina Logística's new $700 million debenture, based largely on his optimistic view of management. By mid-August 2007 the spread on the note's yield over the government's benchmark rate certificate of deposit had narrowed by 25 basis points. A graduate of São Paulo's Instituto Brasileiro de Mercado de Capitais and a law student at the Universidade de São Paulo, Matuo provides "detailed projections of cash flow, based on normal and stressed assumptions, which help us determine risk," says one client.
Nilson Teixeira, who has the Sovereign Debt category all to himself (and also finishes first in Economics), has "a solid economic background and extensive market experience," says one client. The São Paulobased economist joined Credit Suisse in June 2000 after stints at Brazil's Banco Nacional de Desenvolvimento Econômico e Social and at Banco Fonte Cindam. In January, when the benchmark overnight lending rate was at 13.25 percent, Teixeira predicted that slow inflation would prompt the central bank's Monetary Policy Committee to slash the rate to 11.25 percent by year-end. "It was a more aggressive forecast than anyone else's, but he stuck with it," says one investor. In April, when the rate was down to 12.50 percent, Teixeira went further, saying the benchmark rate would be cut to 10.50 percent by year-end. In July the committee reduced the rate to 11.50 percent -- its lowest level in eight years -- and has indicated it may reduce rates further. Teixeira, 45, a graduate of Rio de Janeiro's Pontifícia Universidade Católica, holds a Ph.D. in economics from the University of Pennsylvania.
Eduardo Loyo UBS Pactual
Guilherme da Nóbrega Itaú
Returning to the top spot after failing to rank last year, Nilson Teixeira of Credit Suisse wins high marks for "insightful research and out-of-consensus calls," according to one investor. In April the Credit Suisse economist, who also wins the Sovereign Debt category, predicted that the steady inflow of dollars would strengthen the real, then at R2.03 to the dollar, to R1.90 by year-end. It got there by June. Teixeira "was the first to forecast significant currency appreciation," says one client. Eduardo Loyo, who was named UBS Pactual's chief Brazil economist in May, debuts in second. In June he predicted that continued slow inflation would spur rapid reductions in the central bank's benchmark overnight lending rate, then at 12.50 percent. Sure enough, the bank slashed the benchmark rate by 50 basis points later in June and a further 50 basis points in July. Also a newcomer, Guilherme da Nóbrega of Itaú Corretora de Valores claims third. Last October the São Paulobased economist forecast a trade surplus of $48 billion by year-end 2006. In December, Brazil posted a record $46.07 billion trade surplus.
Pedro Martins Jr. Merrill Lynch
Roberto Attuch Credit Suisse
Eduardo Nishio UBS Pactual
Pedro Batista seizes the top spot for producing what one investor calls "by far the best strategy product on the Street," especially a monthly portfolio of ten top picks, which outperformed the Bovespa by 20.8 percentage points year-to-date through mid-August. The Rio de Janeirobased analyst, who is also No. 1 in Electric & Other Utilities, earned an engineering degree from the Universidade Federal do Rio de Janeiro in 1997 and worked in financial planning at Royal Dutch Shell's Brazilian subsidiary before joining Banco Pactual in 1997. Pedro Martins Jr. of Merrill Lynch repeats in second place for his "uncanny ability to sense where you can make money," according to one client. The São Paulobased analyst recommended diversified holding company Bradespar in January, citing rising demand for iron ore. By mid-August the shares had jumped 40.3 percent, while the broad market was up only 17.3 percent. Roberto Attuch of Credit Suisse, who debuts in third, "focuses on the right issues," says one investor. In January the São Paulobased analyst, who also is No. 2 in Banking & Financial Services, told investors to buy iron ore miner MMX Mineração e Metálicos, noting its large reserves. By mid-August the share price had more than doubled.