The Brazilian Stock Market – Maintaining Values

The Brazilian stock market, as measured by the Bovespa 100 Index (Ibovespa) is up
2.6% for the year, and 5.8% for the month of March. The last day of March saw the
Index close above 70,000 points for the first time since early January. The current rally
appears to have been largely without any increased interest by foreign investors, whose
participation has oscillated in the 11% to 13% of recent buying and selling activity, way
down from the 17% to 19% levels that were seen last year.

Many analysts have been suggesting that the wind should have ceased to drive emerging
market stocks due to the withdrawal of liquidity in many world markets where the
respective governments had created liquidity as an attempt to alleviate the worst aspects
of the world crisis. Indeed, Brazil itself is one of those markets, where the government
is re-imposing levels of bank reserves back to pre-crisis levels. Most of the tightening of
liquidity, both in Brazil and elsewhere has yet to happen, but the effects of the
tightening to date do not seem to have affected the Brazilian appetite for equities.

Figure 1
Ibovespa in 2010
72000
71000
70000
69000
Ibovespa

68000
67000
66000
65000
64000
63000
62000
4/

1/

8/

1/

8/
11

18

25

15

22

15

22

29
1/

2/

2/

3/

3/
/1

/1

/1

/2

/2

/3

/3
/3
2

2
2
/2

/2

/2

/2

/2

/2

/2

/2
01

01

01

01
01
01

01

01
01

01

01

01

01
0

0
0

0
0

Source: Yahoo Finance

Another predicted movement is that of international investors away from emerging

markets where the increase in value has been significant, and where there is deemed to
be little upside. Markets such as the USA, however, are considered to still have lots of
upside, and be a more secure bet for investors. As previously mentioned, international
investors are currently playing a much less significant role in driving the Brazilian
market, and therefore the existing rally is being driven by Brazilian institutional
investors.

Figure 2 below shows the performance of the Brazilian Stock market over a 21 month
period, from June 30th 2008 to March 30th 2010. The June 30th 2008 index for all
markets is 1. We continue to track the IBovespa as compared with five other stock
market indices, the Dow Jones Industrial Average (“DJI”), and the Standard and Poors
500 (“S&P 500”) of the USA, the Financial Times and London Stock Exchange 100
Index (“FTSE 100”) of the United Kingdom, The Cotation Assistée en Continu 40
(“CAC 40”) of France, and China`s Hang Seng Index (“HSI”). On a comparative basis
we can see that the Ibovespa fell farther than any other of the markets early on in the
crisis, but since November 2009 has emerged as the best investment over the period.
Indeed, the Ibovespa is nearly 8% above its nearest rival, which is the FTSE, having in
recent days attained the level i.e. 1, that it had 21 months ago. The Hang Seng, and the
DJI are roughly equal at 96% of their June 30th 2008 level, and S&P is at 91% with the
CAC 40 at 89%. Therefore, we can conclude not only that the Bovespa has been the
best investment, but also, that it has consistently, as in the last few weeks, accompanied
the upward trends of the market.

Figure 2
Stock Market Performance, J une 30 2008 to March 31
1,2 2010
1,1
1
0,9
0,8
0,7
0,6
0,5
0,4
2010/08
17110/ /0
15121/ /0
29/12088

1910//09
16110/ /0
30/11099
14/11/0
28/1 /09
30
14/6/
28/7/08
11/7 08
25/8//08
8/ /8/08
229/008
6/ /9/8
3/ /1 08
1/ /1 088

12/1 /0
26/12/08
9/ /1//098
232/009
9/ /2/9
233/009
6/ /3/9
204/009
4/ /4/9
185/009
1/ /5/9
156/009
29/6/9
13/6 09
27/7//09
10/7/09
24/8 09
7/ /8//09
219/009
5/ /9 9
2/ /1 09

11/12/09
25/12/ /09
8/ /1/109
222/110
8/ /2/0
223/110
/3 0
/1
0
DJ I FTSE CAC 40 HSI Ibovespa S&P

Source: Yahoo Finance

Notwithstanding the tax placed on foreign investors in Brazilian equities, being the 2%
on foreign investors entering the Brazilian market, or the 1.5% on Depository Receipts
for investors buying equities abroad, Brazil has accompanied the trends in the market.

Figure 3 shows the developments of the same six stock markets. While Brazil is not
alone in standing above the other participants, it is one of the four markets that have
increased since the imposition of the taxes on October 20th 2009 by 7% to 8%. The
others are the Dow Jones and the S & P, both of the USA, and the FTSE of the UK.
The CAC 40 is up by 2.6%, and the Hang Seng is down by 5%.

Figure 3
Stock Markets Performances, October 20th 2009 - March 31st, 2010
115,0%

110,0%

105,0%

100,0%

95,0%

90,0%

85,0%
5/ /2

2/ / 20

9/ 01

2/ 20

9/
20

27 /2

3/ /2
10 0

17 /2

24 /2
1/ /2 9

8/ 20 9

15 20
22 /2

29 /2 9

12 01 9

19 20

26 20

16 01
23 / 20

16 01

23 20

30 20
1/ 00

2/ 1

2/ 0

3/ 10

3/ 10
11 00

12 0

12 09
/1 00

/1 00

/1 09
/1 00

/1 10

/2 0

/3 0
/1

/1 09

/1 00

/1 00

/1 0

/1 10

/2 10

/3 10

/3 10
2

2 0

20

2
0

2
2

/
0

/
1

/ 0

/2
2

DJI FTSE CAC HSI IBOV S&P

01
0
9

9
9

Source: Yahoo Finance

Conclusion

The good economic news for Brazil continues with high expectations for economic
growth in 2010 (5.5%). Effects on the stock market of retractions in liquidity should be
felt during April and May.