2008 : Global economy and its effects on Brazilian markets

Transcription

1 HSBC Investments 2008 : Global economy and its effects on Brazilian markets March, 2007

2 Scenario Review

3 Summary: Key performance drivers and risks Real improvement in fundamentals: Superior growth prospects Favorable trend in current accounts Increasing international reserves Strong FDI and capital flows Integration in the world economy Better information and increasing transparency Continued improvements in Latin American institutions and economic policies Risks: Stronger than expected deceleration in global economy Higher interest rates in developed markets and consequently tighter liquidity Equity market outlook: Positive view due to valuation in relation to other markets and constructive global environment

4 Equity Markets Summary Country Market Cap P/E EPS Growth Local Index Performance USD million YTD 3M 6M China 2,405, % -13.4% -18.0% 2.1% India 717, % -14.7% -8.1% 20.4% Russia 1,191, % -9.9% -5.3% 10.3% Brazil (*) 807, (*) % 4.5% 8.6% 41.1% Argentina 30, % 0.0% -3.7% 5.7% Chile 119, % 2.7% 2.4% 5.4% Mexico 316, % -0.4% 0.2% 0.8% Peru 33, % 5.3% 3.0% -5.2% Colombia 6, % -6.1% -7.4% 2.6% ASIA 4,694, % -6.4% -8.1% -0.8% EMEA 2,305, % -8.3% -6.0% 11.2% LATAM 1,314, % 1.7% 4.4% 26.5% GEM 8,314, % -6.3% -4.8% 11.4% US % -9.4% -9.5% -9.1% EUROPE % -7.5% -8.8% -1.7% JAPAN % -3.8% -7.7% -6.0% (*) The table shows consensus expectation for EPS growth of MSCI Brazil. HSBC Investments expectation of EPS growth for the Ibovespa index is 21% for 2008, aligned with consensus. Sources: JP Morgan, IBES, Deutsche Bank, MSCI and HSBC

5 Brazil has solved its main economic problems Irresponsible Economic Policy Indexation High Inflation External dependence Low and volatile growth rates International Shocks

6 that had led to hyperinflation in the past 2,500 CPI (annual %) 0.9% Per day! 2,000 1,500 1, Source: IBGE

7 and generated inconsistent growth rates 10 GDP (annual %) Source: IBGE

8 Important reforms were implemented during the last decade 1982 Mexico s default 1994 Mexican devaluation Mr Cardoso becomes president 1999 Floating exchange rate 2001 Argentine default 1980 US interest rates hike 1993 Mr Cardoso (centre right) becomes Finance Minister The Real plan (new currency and desindexation of the economy) is launched Asian crisis, Russian default & LTCM crisis 2003 Mr Lula da Silva (left) becomes president : High Growth Brazil's real average GDP growth reaches 7.5% p.a : Crisis Brazil struggles with an unsustainable debt burden, hyperinflation and crippling levels of real interest rates 1994-Today: Reforms Sound economic policies reduced the external vulnerability of the economy and remove some of the obstacles to growth Tomorrow Stable institutions Sound economic policies Sustainable growth Source: HSBC Investments, February, Financial system 1998 Partial social security reform 1999 New economical policy framework: floating exchange rate, inflation targeting, fiscal austerity 2000 Fiscal Responsibility Law 2002 Election of president Lula reduced the political risk 2003 Public sector social security reform During this period: openness of the economy and privatizations

9 Inflation has now come down to low levels CPI (annual %) Before Real Plan 2,500 2, , , After Real Plan Source: IBGE

10 and external accounts improved considerably Trade Balance (USD billion) Current Account and FDI (% GDP) Current Account FDI Source: MDIC / Central Bank / HSBC

11 mostly due to the high export price. However, each sector has a different impact. Export prices in BRL Export prices in BRL Durable goods Capital goods Capital goods average Durable goods average Source: Funcex/HSBC

12 Brazilian government became a net creditor in foreign currencies Net Foreign Debt as a % of GDP Brazil Chile Colombia Mexico F 2008F 2009F Source: Central Banks, Ministry of Finances, IFS, IMF, CS and HSBC

13 and net public debt assumed a healthy path. Net Public Debt as a % of GDP Brazil Chile Colombia Mexico F 2008F 2009F -20 Source: Central Banks, Ministry of Finances, IFS, IMF, CS and HSBC

14 The China effect bodes well for Brazilian commodities China vs USA share in world exports Brazilian exports: destination 16.0% 14.0% 12.0% 10.0% Asia 16% Other 22% 8.0% 6.0% 4.0% 2.0% China USA LatAm 23% USA 18% 0.0% Europe % Source: IIF and Banif.

15 Brazil has a more diversified platform of exports and trade partners Breakdown of Exports Basic (% of total) Manufactured Source: MDIC, USDA, US Department of the Interior and US Geological Survey, HSBC Research Basic Agricultural Ranking* Products 1 st Ethanol 1 st Sugar 1 st Beef 1 st Coffee 2 nd Soybeans 2 nd Corn 2 nd Poultry 3 rd Pork Basic Metals Ranking* Products 1 st Quartz 1 st Niobium 2 nd Iron Ore Manufactured 2 nd Bauxite Ranking* Products 3 rd Manganese1 Orange Juice 5 th Tin Ore 3 rd Footwear 5 th Computers 6 th Aluminum 6 th Textile 7 th Vehicle 10 rd Steel Brazil is a natural candidate to be the top food supplier to China

16 reduced the external vulnerability substantially Source: Brazilian Central Bank

17 A sound fiscal policy... 6% 5% Primary Fiscal Surplus - (% of GDP) 4% 3% Average % 1% 0% -1% -2% Source: Brazilian Central Bank

18 and an efficient management of public debt... Breakdown of Federal Public Debt (% of total) 40% 35% 30% 25% 20% 15% 10% 5% 0% Dollar Fixed-rate -5% Source: Brazilian Central Bank

19 led to a stabilization of public debt (as a proportion of GDP) 60 Total Public Debt (% of GDP) 50 Average fiscal surplus: 3.5% Source: Brazilian Central Bank

20 Structural fundamentals of the Brazilian economy are more solid Sovereign Risk (Embi Brazil bps) Source: Bloomberg.

21 In this context, the decline in interest rates is sustainable 50 Interest rate (Real Selic rate -effective and forecast- in red and grey and inflation effective and forecast- in blue) Real interest rates below 10% Source: Brazilian Central Bank; HSBC Forecast

22 Real Estate financing has increased over 700% in the last five years Mortgage in R$ billllion Source: Jose Claudio Securato (Saint Paul Institute of Finance) and BNDES

23 while the number of real estates units launched grew 486% in the period 180, ,000 New launches 169, , , ,000 80,000 60,000 40,000 28,900 20, Source: Jose Claudio Securato (Saint Paul Institute of Finance) and BNDES

24 and despite this strong growth, mortgage is still in early stage 120% 111% 100% 80% 65% 60% 40% 20% 0% 13% 9% 1.7% Netherlands US Chile Mexico Brazil Source: Jose Claudio Securato (Saint Paul Institute of Finance) and BNDES

25 Auto industry also shows stronger indicators... Auto loan longest term (months) Auto sales (million units) Market share of entrance cars* % 70% 60% 50% 40% 30% 20% 10% 0% 67% 55% *Sub-compact cars with 1.0-liter engine Source: Jose Claudio Securato (Saint Paul Institute of Finance) and BNDES

26 What about tourism? Rank Country Share 1 st France 9,9% 2 nd Spain 7,1% 3 rd USA 6,1% 4 th China 5,5% 5 th Italy 4,9% 6 th UK 3,6% 7 th Hong Kong 2,9% 8 th Mexico 2,7% 9 th Germany 2,7% 10 th Austria 2,6% Brazil is still not among the top 10 tourism destinations Source: WTO

27 Capital markets also helped with the growth of investments Number of new companies in the Bovespa stock exchange Sources: Bovespa and HSBC

28 The private consumption is one of the main drivers of economic growth 6 5 GDP Private Consumption (1) E 2008 E Source: Bloomberg and Merril Lynch

29 Growth: vehicles sales remains at high level; construction also double-digit 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Retail Sales Vehicle Sales Construction -25% Source: Bloomberg and Merril Lynch

30 Fast loan growth in long-term products like mortgages, still under-penetrated 200% 150% Loans as a % of GDP 165% 150% 100% 50% 0% 36% 76% 17% 18% ARG BRL CHL MEX USA JPN Corporate Retail Mortgage Others Source: Bloomberg and Merril Lynch

31 Minimum wage has grown above inflation in the last five years % 400 Real Growth (YoY%) Nominal Minimum Wage 12% 10% 350 8% 300 6% 4% 250 2% % Source: Bloomberg and Merril Lynch

32 However, Brazil is behind other emerging countries in terms of growth Brazil s disappointing growth in relative terms GDP (annual) * Average Brazil East Europe Asian Countries BRICs (ex Brazil) Latin America (ex Brazil) Estimates of different Brazilian potential growth scenarios (based on investments rate and productivity) Investments Productivity reflects the low growth potential of Brazilian economy Source: IMF; HSBC estimates

33 The poor quality of fiscal policy is still a problem to be tackled 40 Total Government Tax Revenues (% GDP) Source: Central Government

34 The balance of risk is negative Output Gap Inflation Expectation Average ( ) 3% 2% 4,5 4, % 4,3 0% -1% 4,2 4,1 4,0-2% 3,9-3% Sep-97 Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 3,8 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Source: Central Government and HSBC

35 which is consistent with our view of flat interest rates in the coming quarters Interest Rates (%) Real Interest Rates (%) Source: Central Government

36 Additional reforms are necessary to improve efficiency in the long run Review of regulatory framework Infrastructure: utilities, airlines Judiciary reform Privatization: state banks, roads Tax reform Central bank autonomy Labor reform Political reform Source: HSBC Investments

37 Macroeconomic Snapshot f 2009 f 2010 f GDP ,3 f CPI Nominal interest rate Real interest rate Primary Fiscal Result (%GDP) ,8 f Public Debt (%GDP) ,7 f Trade Balance BRL Currency Source: HSBC

38 Valuation Outlook

39 We are firm believers in the decoupling, but that must be qualified One year weekly correlation of Ibovespa with S&P 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 5/1/96 5/1/97 5/1/98 5/1/99 5/1/00 5/1/01 5/1/02 5/1/03 5/1/04 5/1/05 5/1/06 5/1/07 5/1/08 Sources: HSBC

40 5/1/08 Even though correlation and beta remain large Betas of one year weekly regression of Ibovespa to the S&P /1/96 5/1/97 5/1/98 5/1/99 5/1/00 5/1/01 5/1/02 5/1/03 5/1/04 5/1/05 5/1/06 5/1/07 Sources: HSBC

41 we expect the Brazilian markets alpha to play major role Monthly alphas given beta=2 Mês S&P 500 Ibovespa α Mês S&P 500 Ibovespa α Jan % 20.4% 15.3% Jan % 1.0% -1.8% Feb % 4.4% 4.3% Feb % -1.5% 2.9% Mar % -3.5% -5.7% Mar % 7.5% 5.5% Apr % 10.6% 8.2% Apr % 8.2% -0.4% May % -18.2% -12.0% May % 12.8% 6.3% Jun % 7.1% 7.0% Jun % 3.5% 7.1% Jul % 0.7% -0.4% Jul % 3.4% 9.8% Aug % -0.4% -4.6% Aug % -4.3% -6.9% Sep % -0.9% -5.8% Sep % 18.7% 11.5% Oct % 9.0% 2.7% Oct % 14.0% 11.0% Nov % 5.7% 2.4% Nov % -6.5% 2.3% Dec % 7.5% 4.9% Dec % 2.4% 4.1% Jan % -6.0% 6.2% Feb % 12.7% 13.7% Sources: HSBC Total Alpha % % Since July %

42 The correlation between equities and sovereign risk has diminished but we expect a recoupling Spread Over Treasury Ibovespa jun/05 out/05 mar/06 jul/06 dez/06 mai/07 set/07 fev/ Sources: Bovespa and HSBC

43 Brazil has further room to converge to IG Emerging Markets Sovereign Risk 350 Brasil México Rússia Turquia dez/06 jan/07 fev/07 mar/07 abr/07 mai/07 jun/07 jul/07 ago/07 set/07 out/07 nov/07 dez/07 jan/08 fev/08 Sources: JP Morgan

44 Ibovespa earnings strength will persist another year, even being conservative 5,000 4,500 Trailing 12M EPS 2008 Expectected EPS 4,000 3,500 3,000 2,500 Expected growth for 2008 EPS: 21% 29-jul fev-06 2-set mar-07 7-out abr nov-08 Sources: HSBC, Datastream

45 While it s still cheap in P/E terms Thailand Hungary Turkey Argentina Russia South Africa Korea Taiwan Mexico Poland Brazil Malaysia Philippines Indonesia Czech Chile China India Expected 12m Fwd P/E MSCI Index Sources: MSCI, Merrill Lynch

46 According to our top-down models, we expect at least 18% upside in 12 months. Bottom up research gives an even larger upside. 90,000 85,000 80,000 Ibovespa x country risk Sovereign Risk Model Feb-29 12M Target: 75,000 (sov. risk 125) 75,000 70,000 65,000 60,000 55,000 Bottom-up target: Upside: 30,7% 50, Source: HSBC

47 Larraín Vial Small Caps Fund Snapshot Fund size: 71 US$ mi Number of companies: 25 Average volume traded (per stock, daily): US$ 3,4 mi Days to liquidate: 21 Market Cap (US$ bi) Sales Growth 2008e EPS Growth 2008e P/E 2008e Ibovespa % 21,0% 13.5 Small Caps Fund Picks % 76,5% 15.7 Sources: Bovespa and HSBC

48 Larraín Vial Small Caps Fund Sector Breakdown Highway Concessions 3% Oil 5% Banks 5% Transportation 3% Other 7% Real Estate 16% Healthcare 11% Logistics 6% Food 6% Software 10% Industrials 9% Agribusiness 9% Retail 10% Source: HSBC

49 Larraín Vial Small Caps Fund Performance (Inception 24-dez-07) dez/07 jan/08 fev/08 Larraín Vial Small Caps Fund IBrX 100 MSCI Small Caps Brazil MSCI Small Caps World Sources: MSCI

50 Sample of companies on the Small Caps Fund Company Sector Mkt Cap (US$ mi) EBITDA 08 % Sales 08 % Earnings 08 % P/E 08 Real Estate 2, % 99.5% N/A 47.4 Logistics % 32.6% 109.4% 12.0 Agribusiness 1, % 96.6% N/A 38.9 Food 2, % 62.7% 109.3% 9.3 Sources: Bovespa and HSBC