Fitch keeps the Brazilian credit rating at BB, with negative outlook

Fitch Ratings reinforced Brazil’s credit rating on ‘BB’, with a negative outlook. That is, with the possibility of the classification being revised downwards in the future.According to the agency, the country’s ratings is limited by the structural weaknesses in public finances and high government debt, weak growth prospects and weaker governance indicators than the country’s peers, in addition to the recent history of political instability.

These weaknesses, Fitch added, are offset by the economic diversity of Brazil and consolidated civil institutions.

The negative outlook reflects the continuity of uncertainties related to the sustainability and strength of the Brazilian economic recovery, the prospects for medium-term debt stabilization and the progress of the legislative agenda, especially the pension reform.

Fitch expects a modest cyclical recovery in Brazil, with growth accelerating from 0.6% in 2017 to an average of 2.6% during 2018 and 2019. Consumption began to recover, sustained by lower inflation, which drives wage gains, stabilization of the unemployment rate and a recovery of consumer credit. A recovery in investment is also expected in the coming years.

According to the agency, the risks that can cause the government not to reach its fiscal goals in the short term include a weaker economic recovery and the difficulty in cutting public spending, especially in the election year. The implementation of the pension Reform and other adjustments will be necessary to ensure that expenditures meet the target in the medium term.

Fitch projects that Brazilian public debt will continue to grow during the forecasted period, even taking into account the impact of the National Treasury’s loan payments anticipated by the National Development Bank (BNDES) between 2017 and 2018. The agency projects that debt will reach 76% of GDP in 2017 (above the median of the “BB” countries, 45%) and advance to 80% in 2018.

Brazil’s current account deficit is expected to fall below 1% in 2017, according to Fitch projections, and should remain below 2% in the period projected by the agency. The deficit fell 80% during the first nine months of 2017, compared to last year, with the growth of the trade surplus.

Funding of Brazilian companies with debt and equity jumps to R$ 192 billion (US$ 60 bi)

The wind begins to shift to the capital market in the wake of falling interest rates to near historic lows and the contraction of bank credit after two years of deep recession. Since last year, the favorable environment has opened space and consolidates a trend of strong growth for corporate debt issues, along with capital openings and subsequent stock offers, which increasingly assume a major role as a source of financing for large companies .
Between January and September, data from the Brazilian Association of Financial and Capital Market Entities (Anbima) shows that the issuance of fixed income securities in Brazil and abroad by companies plus funding through variable income in the country reached R$ 176.3 billion, or three and a half times the volume of R$ 49.9 billion granted by BNDES in the same period, according to figures from the state bank itself.

For Sergio Goldstein, chairman of Anbima’s corporate finance committee, the expansion is expected to continue in 2018: “the economy probably accelerates next year and thus there’s no way the capital market does not come along.”

A singularly favorable situation fuels this movement of greater participation of the capital market as a source of funds: falling interest rates and prospects that it will remain close to historical lows for a prolonged period, low inflation, growth, albeit gradual, and a change in the policy of subsidized rates by the BNDES.

Unilever buys Brazilian brand of natural foods

Unilever announced this Monday (2) the acquisition of Brazilian brand Mãe Terra. The company specializes in natural and organic produce and was established in 1979. The acquisition cost was not disclosed. 

Mãe Terra, which produces organig cereals, cookies and other snacks, has been growing 30 YoY and its acquisition is an attempt from the global giant to become relevant in the organic market in Brazil. 

The acquisition is still pending standard  regulatory approvals

Should you buy Brazilian stocks right now?

Brazil is in a very binary situation right now and that’s bringing huge volatility. Brazil’s current crisis is a fiscal one. That’s what caused the huge drop up until 2015. The labor party added a lot to the social networking in its 12 years in power and did not do the reforms the country needs, most notably, the pension plan reform. Pension plan deficit represents already 2.8% of the GDP, without change and with an aging population, this number will be unsustainable in as soon as 5 years. The labor party did have its merits in the beginning by taking a lot of Brazilians out extreme poverty but the lack of political power and will to make the reforms, coupled with huge corruption, erased most of its merits. So, comes 2016 and everything changes? Stock market and currency jumps and interest rates go down. The economy must have improved, right? Wrong! The only thing that improved was the expectation. With the rumors and subsequent consolidation of Dilma’s impeachment, the new president, Temer, who has in congress support what he lacks in popularity, was doing all the necessary reforms to the economy. The GDP has not improved yet, but the perspective is great and the price is right.

Then, comes corruption again and now it implicates Michel Temer. Stocks go down 10% and currency another 7%

Short after, markets start to recover thinking that, with or without Temer, the government base in the congress will be the same and the reforms will happen.

Then the binary dilemma: economy will continue to improve if these reforms pass and that seems to be the scenario both with the current president or with one replaced by the congress. In Brazil, if a president and vice president are impeached after two years in power, the replacement is chosen by the congress until the next election. However, there’s strong popular movement and even a proposed constitutional amendment to do direct elections right now and not wait until 2018. If that happens, you could see the labor party or other extremist come up strong and drop the stock market and currency further.

So, will this “diretas já” movement happen? It’s possible. The country is in big disbelief with the political representatives and not without reason. The curious part is that the direct election is what would be the most harmful to the economy and therefore, the population.

Bottom line: if you are looking at the long term: more than 5 years, this is probably a good time to buy. But in the next two years, except a lot of volatility or just remain neutral altogether (my position right now). If you are looking for hedge, you can consider BZQ, an ETF that seeks daily results that correspond to twice (200%) the inverse of the MSCI Brazil Index

Brazil is out of recession. But should you buy it?

President Michel Temer and economic ministers will celebrate the growth of 1% of the Gross Domestic Product (GDP) in the first quarter of this year, compared to Q4 of 2016, excluding seasonal factors. When they do this, they will actually be celebrating the growth of agriculture and foreign demand (exports). Domestic demand – household consumption and investments – continued to fall and with worse results than expected.In the economists’ estimates, GDP would grow, on average, 0.9% in the first quarter of 2017 QoQ, in the seasonally adjusted series. Here, the recorded growth of 1% was slightly higher. But economists predicted 9.4% growth in agriculture and the GDP brought a rise of 13.4%. In industry, the result was also better, of 0.9% against a forecast of 0.8%. The services sector remained stable, but the expectation was a growth of 0.3%.

It is on the demand side that the GDP has been more frustrating. Economists projected the first increase (of 0.4%) after eight consecutive quarters of falling household consumption. The IBGE indicated, however, a further retraction of 0.1%, postponing the recovery. And the investment retreat was much deeper than expected. Estimates indicated a small decline of 0.3%, but the reality was cruel and the figure was negative at 1.6%. All comparisons are QoQ, minus the seasonal effects.

Weak domestic demand is also clear in trade data, down 0.6% from the end of last year.

The government may even celebrate the outcome, but from the standpoint of indicating a domestic recovery, GDP in the first quarter was worse than expected. And the political crisis and the signal issued yesterday by the Monetary Policy Committee (Copom) that the interest rate down trend will slow down, act to further delay the good news, so long awaited.

Brazilian IGPM shows second month of deflation

The General Market Price Index – (IGP-M) recorded deflation of 0.93% in May, after falling 1.10% a month earlier, according to the Getulio Vargas Foundation (FGV). It is the lowest rate for May months since the beginning of the indicator series in 1989. It is also the third lowest variation for all months of the series, with June 2003 and April 2017 being the lowest ones. In May 2016, the indicator, which serves as a reference for the readjustment of contracts such as rent, rose 0.82%.The fall in the fifth month of 2017 was driven by wholesale deflation, especially industrial products, and by the slowdown in consumer price hikes. The decline of 0.93% was higher than the 0.82%, on average, estimated by economists. The range of estimates was for a decline between 0.74% and 0.89%.

In the year, the IGP-M decreased by 1.29%. In 12 months, it rises only 1.57%, compared to analysts’ forecast of 1.69%.

How to make sense of Brazilian inflation indexes?

Foreign direct investment in infrastructure grew more than 500%

Foreign capital inflows into infrastructure activities in Brazil grew more than 500% in the first four months of this year compared to the same period in 2016, reaching a mark of US$ 11.4 billion. The flow represents more than 50% of direct investment in the country for capital participation operations registered by the Central Bank (BC) from January to April, a total of US$ 21.5 billion.

Market analysts are projecting, however, that this performance may decline sharply as a result of the new political crisis directly involving President Michel Temer, although this reaction does not mean that investors and infrastructure operators are giving up on the country.

“Basically when an investor is going to put money into a project, he considers risks and returns, both are measurable,” said economist Cláudio Frischtak. “As long as this veil of uncertainty is not lifted, investors will wait,” he said. “That does not mean giving up, I do not know anyone who has given up the country.” Frischtak specializes in the infrastructure area of ​​Inter.B consulting.

Itaú pays US$1.8 billion for 49.9% of XP Investmentos

After two months of discreet talks, Itaú Unibanco closed on Thursday (May, 11th) the purchase of 49.9% of the total capital of XP Investimentos for R$ 6.3 Billion, which includes R$ 600 million in resources that the bank will inject into the company. With the transaction, the country’s largest private bank reserves its space in the process of “de-banking” in progress, in which people are leaving traditional banks for brokerage accounts with banking services. “I believe this transaction will take Itaú and other banks out of the comfort zone, as it will strengthen XP and increase its ability to compete in the investment market,” said Roberto Setubal, co-chairman of Itaú Unibanco’s board of directors.

Kraft Heinz Offers a Merger with Unilever for $143 billion: Rejected for now

Unilever has rejected a $143 billion merger proposal from Kraft Heinz, the Brazilian-controlled food conglomerate 3G Capital and mega-dealer Warren Buffett, setting the stage for a battle between two of the world’s largest consumer products companies.The Anglo-Dutch company, behind big brands like the Dove soap and the Ben & Jerry ice cream, said the offer of $ 50 per share and new papers – an 18% premium on the closing price on Thursday (16) – “fundamentally undervalues ​​Unilever”.

“Unilever has rejected the proposal because it sees no merit, financial or strategic, for its shareholders. Unilever sees no basis for further discussions,” the statement said.

Kraft Heinz’s approach comes at a sensitive time for the UK, with its politicians and big companies trying to maneuver through the uncertainty generated by the country’s exit from the European Union. The decision to leave the world’s largest trading block caused a fall in pound sterling’s value, which made UK assets significantly cheaper and attractive to the attack by wealthy non-British investors.

Unilever has a complex shareholding structure, with papers listed on the London and Amsterdam stock exchanges.

Kraft Heinz said it had made “a comprehensive proposal for Unilever on combining the two groups to create a leading consumer products company with a mission of long-term growth and sustainable living.”

“Although Unilever has declined the proposal, the company is eager to work out an agreement on the terms of a transaction. There can be no certainty that any other formal proposal will be made to the Unilever board.”

Unilever said Kraft Heinz’s offer consisted of an existing Unilever payout of $ 30.23 in cash and a further 0.222 share of the company resulting from the merger.

Shares of Unilever rose 12.5 percent to 37.59 pounds on Friday, giving the company a market capitalization of 113 billion pounds, which means that any acquisition would be one of the largest in history. Its US-listed stocks rose 10.6% to $ 47.08 in pre-opening trading. It is the fourth largest company in the world of consumer products by sales, with revenue last year of 52.7 billion euros.

Under UK rules on takeovers, Kraft Heinz has until markets close on March 17 to make a firm bid or refrain from making a new bid for Unilever for six months.

This merger would unite some of the top brands in the global consumer industry, adding Dove and Knorr to Kraft Heinz’s list of Philadelphia cream cheese, Heinz ketchup and Weight Watchers.

News of the offer comes a day after Kraft Heinz shares fell nearly 5 percent, the biggest daily drop since the big merger that shaped the company in 2015. The company reported a 3.7 percent drop in quarterly sales Quarter and said it intended to step up cost cutting

Like many other consumer products companies, Unilever has been seeing slowing growth as consumers are not loyal to brands in mature markets and are increasingly turning to start-ups for new products.

Emerging markets account for 58% of Unilever’s sales, more than the industry average, and the company relies heavily on them to grow.

Kraft Heinz was formed in a $ 100 billion deal orchestrated by Buffett and 3G Capital in 2015 and has focused on aggressively reducing costs in the companies it has purchased, with the goal of saving $ 1.7 billion annually by 2018.

Analysts expect further consolidation in the industry and speculate that 3G could strike again, two years after its last big business. Some point to Mondelez International as a possible target.

In January, Unilever chief executive Paul Polman shocked investors by warning of “challenging” conditions in the first half of this year, after a slow 2016.

Unilever reported a 3% increase in pre-tax profit in 2016 to 7.5 billion euros, driven by a reduction in costs and an increase in efficiency that raised basic operating margins by 50 basis points to 15.3% .

Polman warned on the occasion that “difficult market conditions” would only ease in the second half of this year. “We expect a slow start, with improvement as the year progresses,” he said.

The immediate cause of poor performance in the last three months of last year came from India and Brazil: Unilever’s second and third largest markets, respectively, representing 14% of the group’s revenues.

Heineken Acquires Schincariol’s Owner, Brasil Kirin, for 664 Million Euros

The Dutch multinational Heineken announced on Monday (13) the purchase of Brazil Kirin, controlled by the Japanese group Kirin, for 664 million euros (R$ 2.2 billion). With the acquisition, Heineken becomes the second largest brewery in Brazil. After the conclusion of the deal, Brasil Kirin will be consolidated with Heineken.The transaction evaluates Brazil Kirin at 1.025 billion euros (R $ 3.3 billion), including debt. Brazil Kirin closed 2016 with a revenue of R $ 3.706 billion, against a revenue of R $ 3.698 billion a year earlier, and an operating loss of R $ 262 million, against R $ 322 million in 2015.

Kirin Brazil has 12 factories and its own distribution network. The company has a particularly strong presence in the North and Northeast, where Heineken has less exposure. The beer portfolio, which includes brands such as Schin, Devassa, Baden Baden and Eisenbahn, has a market share of 9.9%. Brazil Kirin also has a line of soft drinks, with a market share of 2% in the category.

Heineken operates five plants in Brazil and distribution is done by Coca-Cola bottlers. The company said it expects significant cost synergies with the acquisition, with efficiency gains in production, logistics optimization and sales, general and administrative expenses.

Completion of the purchase is subject to the approval of the Administrative Council for Economic Defense (Cade).

Information and news for people considering or actively investing in Brazilian stocks or bonds.

Don't miss the news related to Brazil investment!


Subscribe to this blog and receive notifications of new posts by email.