Prospect of lower interest rates helps support Brazilian stocks

Brazilian stocks have gained in 2009, with the benchmark Bovespa Index up 15% in the year to date. Improving sentiment reflects a number of features, including an initial positive response to the latest US plan to deal with toxic assets held by American financial institutions. Chris Palmer, Head of Global Emerging Markets at Gartmore, believes that Brazil has not been immune from current downturn, but is characterised by structural features that should help its recovery.

"Brazil is suffering from the ‘global stop' that has paralysed the world economy, and companies are paying a much higher credit risk premium than a year ago," says Chris. "But we expect to see real interest rates falling sharply in the next few months. Baseline measures, like the TJLP reference rate, have kept nominal rates artificially high. We think this will change. " The TJLP rate is a long-term rate which reflects the basic cost of financing granted by the government-backed development bank BNDES. BNDES offers financing for strategic infrastructure, industrial and agricultural projects. Its reference rate is significantly below the current overnight rate of 11.25%, although this has been reduced by 2.5% since December 2008.

Chris has just returned from a visit to Brazil to meet executives from leading companies in the region. He highlights Brazil's robust institutions and well-capitalised financial sector. As an exporter of USD-based commodity products, the devaluation of the real against the US currency is also working in Brazil's favour. These features are helping to drive a significant volume of foreign direct investment in Brazil, amounting to $3.9bn in the first two months of the year.