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Brazil Returns to the Boom Times

Brazil’s stock market is soaring, and so is interest in equity research. Investors say these analysts provide the best coverage.

Central banks around the world have been slashing key interest rates in an effort to stimulate borrowing and jump-start local economies mired in malaise. In Brazil the positive effects of low rates have been twofold: Lending is up, and so is equity investment, as many Brazilians move money out of previously high-­paying fixed-­income instruments and into stocks for the first time. Brazil’s central bank has cut its benchmark Selic rate five times this year, to a record-low 8.75 percent; the Selic started the year at 13.75 percent.

With fixed-income investments returning far less than investors are accustomed to receiving, many formerly equity-­shy Brazilians are now willing to take a chance on stocks, according to Carlos Constantini, head of research and chief equity strategist at Itaú Securities in São Paulo. He notes that individuals account for 34 percent of the trading volume on Brazil’s stock exchange, the Bolsa de Valores, Mercadorias e Futuros Bovespa, up from 25 percent in 2005.

“It’s a brave new world,” says Constantini, and research departments covering Brazilian equities have had to adapt to investors who are “more speculative and trading-­oriented” than many of their institutional counterparts. “They’re looking for shorter-­term trades and are more willing to trade the less-­liquid stocks, and usually the gain ­doesn’t have to be so high,” he explains. ­“They’re happy to take their profits and look for the next opportunity.”

There has been no shortage of opportunities for profit-­taking in Brazil this year. The BM&F Bovespa index surged 45.8 percent year-to-date through July, and many economists and equity strategists believe that the nation is in the early stages of a bull market.

In addition to local investors’ pouring money into the stock market, foreign investors are bargain hunting in Brazilian equities after last year’s market rout; July was the fifth straight month of foreign net inflows, according to BM&F Bovespa. This flood of interest is causing a surge in demand for research. The analysts who provide the best insights into Brazil’s booming stock market can be found at UBS Pactual, according to the 2009 All-­Brazil Research Team, Institutional Investor’s sixth annual ranking of the nation’s leading equity analysts. The UBS Pactual team is in first place for a fourth year running; the firm captures 11 total team positions, down from 13 last year, and is apparently in the winner’s circle for the last time — at least under its current name. In April the Swiss bank announced it would sell its Brazilian operations to BTG Investments, a São Paulo–based asset management firm launched last year by André Esteves, former global head of fixed income at UBS. The deal is expected to close later this year.

Nipping at UBS Pactual’s heels, with ten positions each, are Banc of America Securities–Merrill Lynch — vaulting all the way from fifth place after picking up seven positions — and Itaú Securities, jumping from No. 4 after gaining five. Last year’s second-place firm, Credit Suisse, falls to fourth, with nine positions (down from 11). Rounding out the top five is Santander, dropping from third place. The Spanish bank wins seven positions, one more than last year.

Marcelo Audi, Santander’s São ­Paulo–based head of Brazilian equity research, says low interest rates are having a positive impact on the nation’s financial institutions, which were pummeled in the economic meltdown despite being structurally sound and well capitalized. Regulations preclude Brazilian banks from leveraging their assets to the extent that proved so damaging to U.S. and European institutions, but skittish investors apparently deemed them guilty by association and dumped their shares last year. All that is changing now, notes Audi, who captures the top spot in Equity Strategy for the first time.

“We see clear signs that the credit cycle is about to embark on a new expansion phase, which is likely to increase the momentum for financial institutions,” he says. In a July research note, Audi told clients that “the country is entering another long-­lasting consumer spending cycle, which we view as the key driver to pull Brazil’s real gross domestic product growth to 3.5 percent in 2010 from 0 percent in 2009.” He urged them to overweight bank stocks, among others. “Our main investment theme in 2009 and into 2010 and 2011 is the domestic cyclical sectors — mainly, financial institutions, retail, real estate and industrials,” he explains.

Audi, 42, is a 1988 graduate of Fundação Getulio Vargas, São Paulo, with a bachelor’s degree in business administration. Before joining Santander in January 2007, he worked as a Brazilian equity strategist at Merrill Lynch, a utilities analyst at Banco Patrimônio and an investment analyst at Quadrante Investimentos, a money management firm headquartered in São Paulo.

Another analyst making his first appearance at No. 1, Alcir Freitas of Itaú Securities, is far less sanguine on the banking sector. The São ­Paulo–based researcher joined Itaú as a Banking & Financial Services analyst in May 2007, after 12 years covering the sector for BankBoston Brazil, Santander and Banco BBA Creditanstalt. He earned a bachelor’s degree in business administration from the Pontifícia Universidade Católica de São Paulo in 1996.

“I was bearish, but now I’m just cautious” on Brazil’s banks, says Freitas, 36, because “single-­digit interest rates are going to squeeze margins.” Since January he has maintained a neutral stance on banks, with the exception of Banco Bradesco, which he downgraded to underperform in March because of what he views as an ill-­timed expansion strategy. “Its costs are increasing more than the market average, and ­that’s why I see it suffering a little bit more than other players,” says the São ­Paulo–based analyst. Bradesco’s stock has trailed the broad market by 5.8 percentage points since the downgrade, through July.

Freitas has been steering clients toward insurance companies instead of banks. In March he upgraded SulAmérica to overweight, at 19.30 reais, because of the diversified insurer’s “high exposure to the health care segment,” making it virtually recession-­proof. By July 31 the stock had shot up a healthy 68.5 percent, to R32.52, outpacing the broad market by 32.1 percentage points.

Another seemingly recession-­proof sector is real estate, especially with regard to developers of low-­income housing. “There’s a lot of pent-up demand because ­it’s a segment ­that’s been completely ignored by the banks and other home­builders,” explains Gordon Lee of UBS Pactual, who captures first-place honors for the first time in Real Estate, leapfrogging all the way up from runner-up last year. Lee, 36, a native of Mexico who earned a bachelor’s degree in economics from the University of Pennsylvania in 1994, got his start as an analyst covering construction for Barings in Mexico. He joined UBS in 2003 after stints as a real estate analyst at Goldman, Sachs & Co. and Deutsche Bank Securities.

The New York–based analyst has been a longtime advocate of Rio de Janeiro–based PDG Realty Empreendimentos e Participações. He first recommended the devel­oper’s shares back in April 2007 and has reiterated the recommendation repeatedly since, most recently in January. This year through July the stock was up a whopping 137.7 percent.

Debuting atop the Agribusiness sector, which was added this year to the All-­Brazil Research Team, is Luiz Otávio Campos of Credit Suisse. Campos, 30, joined the Swiss bank as a utilities analyst in 2002 after earning a bachelor’s degree in electrical engineering from the University of São Paulo. He has been covering Brazilian agribusiness since 2004, along with the education and transportation sectors. ­“He’s a very busy guy,” quips Emerson Leite, the firm’s head of Latin American equity research.

In June, Campos downgraded his long-­standing top pick, SLC Agrícola, from outperform to neutral. “They are one of the largest grain producers in Brazil and one of the most efficient,” he says, but he believes that the company’s margins going forward will be “very depressed” because of higher fertilizer and pesticide costs. The stock, which at the time of Campos’s downgrade was ahead of the sector by 18.4 percentage points for the year, slipped 3.0 percent through the end of July.

Juliana Rozenbaum of Itaú Securities, who finishes in first place in Consumer Goods for the first time since 2006, when she was with Deutsche Bank Securities (she moved to Itaú in 2007 and was ranked No. 2 last year), notes that lower interest rates have succeeded in motivating Brazilians to shop again, which is important because consumer spending is vital to Brazil’s economic rebound.

Her top stock pick is Lojas Renner, Brazil’s second-­largest department store chain, with 115 outlets; the retailer also offers financial ser­vices, including credit cards, loans and annuities. Renner’s stock was hit hard last year, plunging 49.0 percent as anxious, cash-­strapped consumers stopped spending. “Apparel is not something that consumers really need,” observes Rozenbaum, 33, who is based in São Paulo.

Renner’s story is quite different this year. In July the company reported stronger-­than-­expected second-­quarter results, with same-store sales rising more than 2 percent year-­over-­year. Renner’s stock skyrocketed 74.9 percent in 2009 through July 31.

Brazil’s bull market came roaring back at a time of upheaval for many firms. Pedro Batista, head of Brazilian equity research at UBS Pactual (and the No. 3 analyst in Equity Strategy), says his firm’s pending sale to BTG Investments prevents him from commenting on changes that might take place once the transaction is finalized, but the Rio-­based research director did disclose plans to hire four analysts after having lost nearly a dozen over the past year; the firm currently has 19 researchers, down from 30. The departures included Bruno Pereira, last year’s top-­ranked analyst in Banking & Financial Ser­vices, who left in January to join Leblon Equities, an asset management firm located in Rio, and Guilherme Vilazante, last year’s No. 1 analyst in Real Estate, who joined Barclays Capital in February.

The researchers who remain at the firm track 107 companies, down from 128 a year ago. Some small-cap coverage was sacrificed, Batista says, so that analysts could “focus on the large caps and highly liquid names.” He plans to expand stock coverage as he rebuilds his team after the BTG sale is completed.

Pedro Martins Jr., São Paulo–based director of Brazilian equity research for Banc of America ­Securities–Merrill Lynch (and the No. 2 analyst in Equity Strategy), says the January acquisition of Merrill Lynch & Co. by Bank of America Corp. ­didn’t create any challenges for him; the new parent company ­didn’t have any analysts in Latin America and so was able to easily incorporate Merrill’s 27-strong team. “It was just a matter of adjusting our templates to put the BofA logo in there,” he notes.

However, Martins did have to replace two analysts lost to rival Itaú — including Marcos Assumpção, last year’s second-­place winner in Natural Resources, who left in February — as he significantly expanded his team’s stock coverage, from 88 companies to 101. New stocks include shopping malls and small- and midcapitalization banks, Martins says.

Itaú Securities has undergone profound changes. In March the firm’s parent company, Banco Itaú, merged with Unibanco Holdings and Unibanco-­União de Bancos Brasileiros to become Brazil’s biggest bank, with a market capitalization of R87.9 billion ($38.7 billion). Constantini, formerly the head of research and sales at Unibanco, was charged with integrating his team of 25 analysts with the 31 Itaú analysts and eliminating the overlap; his department now has 27 analysts.

“In keeping what we thought were the best from both sides,” he explains, the firm retained 15 analysts from Itaú and 12 from Unibanco. The researchers cover 135 companies, up from 120 the two departments had followed separately, and Constantini plans to add a few more stocks — “maybe six or seven.” He also added a two-­analyst quantitative research team “to recommend specific sectors and suggest a variety of relative-value, long-short calls,” he says. “We were missing a product that could tell investors how to optimize their asset allocations.”

Credit Suisse has the same number of analysts on its Brazil equity research team that it had last year — 21 — despite having lost co-­director of Latin American equity research and Brazilian banks analyst Roberto Attuch. Leite, now the Swiss bank’s sole head of Latin American equity research (he finishes third this year in Chemicals & Oil), brought Marcelo Telles from Mexico City to São Paulo to oversee coverage of the Banking & Financial Ser­vices sector, where Attuch finished second last year. Credit Suisse analysts track a total of 107 Brazilian stocks, the same number as last year.

Attuch left the firm in November and in March was named head of Latin American equity research for Barclays Capital, which is aggressively expanding not only in Brazil but throughout Latin America. “We intend to have full coverage within the next six months, covering about 100 companies,” says the São Paulo–based Attuch, who has already hired 13 analysts, enticing veteran researchers from ­Citi, ­Credit ­Suisse, UBS Pactual and other firms. “Today we have coverage in Brazil and Mexico, and soon we will have coverage of Peru, Colombia, Chile and Argentina — the full Latin universe.”

That universe is expanding, especially in Brazil, where the market for initial public offerings is showing signs of new life. In June the country saw its largest IPO ever — and the largest in the world in more than a year — as Cía. Brasileira de Meios de Pagamento, or VisaNet, the Brazilian affiliate of credit card issuer Visa, raised R8.4 billion. The shares rose by 11.9 percent on the first day of trading.

The success of the VisaNet IPO “is paving the way for more offers to come,” says Leite. “There are a number of companies that need capital to finance their growth and ambitions.”

Click here to see the All-Brazil Research Team rankings.