Download FX: Are we in the 2002 path?

BRAZIL:
OPPORTUNITIES IN TROUBLED MARKETS
LUIZ FERNANDO FIGUEIREDO
FX: Are we in the 2002 path?
BRL/USD
FX depreciation has been
even more agressive this
time than it was in 2002.
But there are crucial
differences:
4
2.85
3.8
3.6
2.65
3.4
2.45
3.2
2.25
3
2.8
2.05
2.6
1.85
2.4
1.65
2.2
2
1.45
-3
-2
-1
0
1
2002 (LHS)
2
3
months
4
5
6
7
8
2008 (RHS)
Net Public Debt as % of GDP
60.0
55.0
a) Today, Public Debt as
% of GDP goes down
with FX depreciation
(2002 was the opposite);
50.0
45.0
2002
forecast
2008
40.0
35.0
-3
-2
-1
0
1
Months
2
3
4
5
6
7
8
2
FX: Are we in the 2002 path?
CRB Cmdty Index
250
b) Less deflacionary this
time, since Commodity
Prices are falling;
480
245
470
240
460
235
450
230
440
225
430
2002 (lhs)
220
420
2008 (rhs)
215
410
210
400
-3
-2
-1
0
2
3
4
6
7
8
meses até a depreciação
c) External Accounts are considerably more balanced
External indebtedness indicators
2001
2002
2004
2006
2008
Total external debt / GDP (%)
41.2
45.9
30.3
16.1
14.0
Net total external debt / GDP (%)
31.9
35.9
20.4
7.0
- 1.1
Debt service / exports (%)
84.9
82.7
53.7
41.3
20.6
Reserves / short-term external debt
66.7
64.6
99.3
211.7
292.7
3.6
3.5
2.1
1.3
1.1
- 4.2
- 1.5
1.8
1.3
- 1.5
4.1
3.3
2.7
1.8
2.2
Total external debt/exports (ratio)
Current account/GDP (%)
FDI/GDP (%)
3
5
10
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Jan-07
Nov-06
Sep-06
Jul-06
May-06
% p.a.
Real Interest Rates
Quite high by any standard
Real Interest Rate (NTN-B 2015)
11
9.65
9
8
7
6
The Brazilian stock market underperformed,
despite solid macroeconomic fundamentals
MSCI Index avg PE
18
Foreing Cumulative Flow (since Jan/04)
US$ mm
WORLD
EM
BRAZIL
6,000
LATAM
4,000
16
2,000
14
0
-2,000
12
-4,000
10
-6,000
8
2007
2008
Total Debt / Market Cap
120%
100%
Sep-08
Jan-08
Sep-07
Jan-07
Sep-06
Jan-06
Sep-05
Jan-05
May-08
2006
May-07
2005
May-06
2004
May-05
2003
Sep-04
6
May-04
Jan-04
-8,000
Even though companies did take
advantage of the bull market’s
abundant liquidity, they are being
penalized on a relative basis.
Foreign outflow is contributing to
exaggerated movements.
Companies are unlevered
80%
60%
Brazil once again is being traded at a
discount when compared to Latam,
EM and World P/Es.
40%
20%
0%
2002
2003
2004
2005
2006
2007
2008
Source: Bloomberg, Economática, Bovespa
Sectors, such as financial, are being excessively
penalized due to the global credit crisis
Brazilian banks are less exposed to the crisis because :
(1) They are not exposed to the subprime market
(2) There is not the issue of being
“too big to be saved”
Housing credit in Brazil as % of GDP
2.2%
(3) Housing credit still low as % of GDP.
2.1%
2.1%
2.0%
1.9%
1.8%
1.7%
1.6%
1.5%
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
Apr-05
Source: Financial Times, Company Data, Banco Central do Brasil, Mauá Consultoria
Jan-05
1.4%
Seeking comfort in valuation: even stress testing
our base case scenario, upside is attractive
MSCI BRZ - FINANCIALS
15
14
13
12
11
10
9
8
7
6
5
Stressing the scenario for
one of the banks under our
coverage shows that worst
case equals banks trading
at average historical P/E,
considering maintenance
of spreads.
Source: Bloomberg, Company Data, Mauá Consultoria
Stress Test for Bradesco
2008
Base
Brazil GDP
Loans growth
Bad debt provision
P/E
ROE
Upside
5.1%
Aug-08
Apr-08
Dec-07
Aug-07
Apr-07
Dec-06
Aug-06
Apr-06
Dec-05
Aug-05
Apr-05
Dec-04
Aug-04
Apr-04
Dec-03
Average historical multiple: 10.9
Crisis
2009
Bear
Base
Bull
1.5%
2.0%
4.0%
3.0%
+23% -10%
0%
+10%
+15%
4.8% +300bps +200bps +120bps +80bps
10.1
9.4
8.7
8.3
24.5% 19.7%
21.0%
22.6% 23.5%
1%
28%
39%
44%