Brazilian equities continue their year-to-date climb, despite fears of inflation spurred by the country's central bank. Halfway through trading, the country's principal stock index, the Bovespa
Signs that Brazil is overheating
Similar to the situations in Europe, Japan, and the United States, policymakers in Brazil have pursued an aggressive monetary policy designed to spur economic growth since the onset of the financial crisis. Over the past 13 months alone, its central bank has cut the benchmark interest rate by 500 basis points to a record low of 7.5% and, two weeks ago, it reduced banks' reserve requirements to free up an additional $14.8 billion in credit.
These moves have translated into a number of positive economic developments. According to Bloomberg, July retail sales in the country beat economists' forecasts and rose at the second-fastest pace since January. In August, monthly vehicle sales rose to a record 420,101. These two things, combined with rising global commodity prices, drove Brazil's unemployment rate down to 5.3% last month, the lowest ever for August.
Yet, unlike the West, there are now fears that these moves may have been too successful, spurring an unacceptably high rate of inflation in South America's largest economy. Economists surveyed by the country's central bank recently raised their forecast for 2012 inflation to 5.35%, from 5.26%. This is notably well above the bank's target rate of 4.5%. And, as a result, it was revealed today that economists now see the central bank holding rates steady for the remainder of the year.
Brazilian equities hold the line
The possibility that policymakers are at the end of the rope in terms of stimulus has had little noticeable effect on Brazilian stocks thus far today. Of the 27 Brazil-based companies that trade on U.S. exchanges, 16 are up in intraday trading, while only 11 are trending lower.
Leading the way higher is regional airline GOL Linhas
Gol's performance is particularly notable because the country's largest aircraft manufacturing, Embraer SA
Brazil represents 54% of Embraer’s total defense sales. The Brazilian Ministry of Defense seeks to match the other BRICs and protect its natural resources including the Amazon rainforest and offshore oil reserves. Therefore, they are calling for an increase in its defense budget from 1.5% of GDP currently to 2.3%. As a result, I see several years of double-digit organic growth for Embraer’s defense business (15% of total 2012 revenues) given drivers like SISFRON border security system and satellite for the Brazilian Army.
Another favorite among investors is Companhia de Bebidas das Americas
[Ambev] is one of the -- if not the -- highest quality stocks in Brazil. [It] sells Brazil’s most popular soft drinks and beer, as well as Argentina’s, Uruguay’s, and Bolivia’s, all countries where soft drinks or beer accompany nearly every meal. [It] sells seven of every ten beers in Brazil....
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