Friday, October 2, 2009

Blame it on Rio?


Bloomberg reports that Brazil Stocks, Real Rally After Rio Wins 2016 Olympics Bid:
Brazilian stocks rallied, making the Bovespa the world’s best-performing major index today, and the currency gained after Rio de Janeiro was awarded the 2016 Summer Olympic Games.

The Bovespa climbed 1.2 percent to 61,171.99, led by airlines Tam SA and Gol Linhas Aereas Inteligentes SA. The real, the best-performing emerging-market currency against the dollar this year, rose 0.3 percent to 1.7820.

“Improving roads, stadiums, there is going to be a significant boost to growth,” Citigroup Inc. Latin America equity strategist Geoffrey Dennis said in a phone interview from New York. “Brazil is arriving. It has arrived in the global stage. This is a kind of reward for Brazil’s excellent policy.”

Rio, which is hosting the World Soccer Cup in 2014, beat Madrid, Chicago and Tokyo to become the first city in South America to host the Summer games.

The games will help sustain Brazil’s economic growth by injecting $51.1 billion into Latin America’s largest economy through 2027 and add 120,000 jobs annually through 2016, according to studies by a Sao Paulo business school for the Ministry of Sports. Brazil plans $11 billion of investments as host, more than any other of the bidding cities.

“When you look at hotels, the airlines, infrastructure, all these sectors obviously will gain,” said Tony Volpon, Latin America strategist at Nomura Securities International Inc.

Gerdau SA, Latin America’s largest steelmaker, jumped 3.3 percent to 23.86 reais today. Tam, Brazil’s biggest airline, climbed 3.5 percent to 23.81 reais. Gol, the second-biggest, rose 3 percent to 18.34 reais.

The winning bidder may also get a stock-market boost, an economist at Germany’s ZEW institute said Sept. 30.

“Winning the Olympics bid, after having the rights to host to 2014 World Soccer Cup, will definitely increase the chances of more investments to Brazil,” said Adilson Goes, currency director at Fair Corretora, in a telephone interview from Sao Paulo. “Market sentiment turned positive.”

Brazil’s victory also comes after Moody’s Investors Service boosted the nation’s rating to Baa3, the lowest investment- grade, on Sept. 22, one year after the global credit crisis.

The nation’s gross domestic product grew more than analysts forecast in the second quarter, signaling the economy is recovering from the global recession faster than other developing countries.

The Bovespa has gained 63 percent this year, compared with a 19 percent rise in the MSCI World Index of 23 developed countries. It rose 1.4 percent this week.

Did anyone really believe that Rio would lose the bid to host the 2016 Olympics? What was President Obama thinking flying off to Copenhagen for the International Olympic Committee’s site-selection meeting? Talk about an Olympic flop.

The only other city that had a chance was Madrid. But as much as I love Madrid, I knew Rio was a shoe-in. It's about time South America hosts the Olympics and Brazil is the "B" in BRIC economies. The IMF sees Brazil growing faster in 2010 than global economy.

Back in August, CPP Investment Board (CPPIB) announced that it has entered into a joint venture with Cyrela Commercial Properties S.A. Empreendimentos e Participações, GIC Real Estate, the real estate investment arm of the Government of Singapore Investment Corporation, to invest up to US$250 million for the development, acquisition and management of institutional-quality commercial properties in Brazil. That appears to have been a very wise decision.

But along with all the praise, Brazil's economy faces serious challenges. For one, if they're not careful, they risk overheating. There is a lot of speculative money flowing into Brazil and now that Rio won its bid for the 2016 Olympics, you can expect these flows to continue pouring in.

Brazilian pension authorities are taking notice. Bloomberg reports that according to Abrapp, the nation’s pension fund association, Brazil's pensions don't need more stocks:

Brazilian pension funds have no “great need” to buy more stocks as a possible rise in interest rates next year will boost returns on bonds, said Abrapp, the nation’s pension fund association.

“Funds will have to take more risk, but this doesn’t mean letting go of prudence,” said Abrapp president Jose de Souza Mendonca. “The funds won’t change much from where they are today” with about 30 percent invested in stocks, he told reporters at Abrapp’s annual conference in Curitiba, Brazil.

The monetary council last week approved changes to regulations that will allow the 455 billion-real pension fund industry to move all of its assets out of fixed- income investments. Pension funds were previously required to keep at least 42 percent of funds in fixed-income assets.

Pension funds, which invest 63 percent of their 455 billion reais ($256 billion) of assets in fixed income, have a “comfortable” surplus, Mendonca said. The funds will likely have a return of 16.8 percent this year after reporting a loss of 1.6 percent in 2008, he said.

The likelihood that rates will rise next year gives fund managers more time to adjust, he said.

Brazilian interest-rate futures suggest central bankers will raise the benchmark lending to about 11 percent by July 2010 from a record low of 8.75 percent today, according to data compiled by Bloomberg.

Prudence is critical if Brazil wants to grow without overheating. But other fund managers are going full steam ahead. Bloomberg reports that BB DTVM, Brazil’s biggest asset-management firm, is betting on commodities:

Oil prices and Brazilian stocks have room to rally as investors underestimate the speed of the global economic recovery, said Joao Ayres Rabello, the president of BB DTVM, the nation’s biggest asset-management firm.

Real estate companies, which have more than doubled this year, and raw-material exporters may be poised for the biggest advance among Brazilian stocks, said Rabello, who oversees the equivalent of $167 billion in assets at BB DTVM, the asset- management arm of Banco do Brasil SA. The firm will begin raising money tomorrow for a fund that will bet on gains in oil prices and reimburse investors if futures contracts traded in New York decline, he said.

“This is a call on global growth and the possible demand for oil,” Rabello said in a telephone interview from Rio de Janeiro. “The recovery of commodities and rebound in the domestic market will probably happen a bit faster than people expect, leading us to believe that profits will be better and it will bolster the market.”

I hope Mr. Rabello is right because if global growth falters, so will the demand for oil. And those speculative flows will leave faster than they came into Brazil.

But the Brazilian story isn't just about speculative flows. There are strong fundamentals driving growth in Latin America’s biggest economy. And while huge inequalities still exist, Brazil has rightly claimed its place among the world's developed economies. I congratulate them on this well deserved win and look forward to the 2014 World Cup and 2016 Olympics. Parabéns!


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