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Analysis: Brazilian recession will be brief

Brazil, long thought to be the one country that might escape recession, slumped into one last week.

Latin Americas largest economy was hit as demand for its exports dropped and domestic consumption slowed, according to the Instituto Brasileiro de Geografia e Estat체ica.

Its economy contracted by 0.8% in the first quarter this year, compared with a 3.6% contraction in the fourth quarter of 2008.

The slowdown will be brief: one quarter of negative growth, like in Australia, says Michael Power, a strategist for Investec Asset Management. The contraction was caused largely by the froth being blown off commodity prices, he adds.

In Brazil, things tend to slow down very quickly but pick up very quickly again, Julian Thompson, the head of emerging markets equities at Threadneedle, says. Its economy is one of the very few economies in the world that had been resilient so far.

This is mainly because exports are, at about 15%, a relatively low share of Brazils GDP.

Thompson says that although Brazil is technically in recession it is still performing better than expected.

However, Martial Godet, the head of emerging market investments at BNP Paribas Investment Partners new markets division, says that what is happening in Brazil is more concerning than in China and other Bric (Brazil, Russia, India and China) countries.

It is difficult to determine where Brazil is positioned, he says. There are high levels of uncertainty. While some economic indicators, such as industrial production figures, suggest deterioration, other data, such as the countrys trade balance, suggests an improvement.

Domestic activity is on the same level as last year, which shows there is at least some resilience. Godet expects a flat performance for the Brazilian economy. It remains one of the best performing markets, globally and among emerging markets, he says.

Alex Tarver, the global emerging markets product specialist at HSBC Global Asset Management, says Brazil is well positioned to benefit from global rebound owing to good economic fundamentals.

These include fewer structural constraints, a less traumatic de-leveraging and better structured and monitored financial systems, Tarver says.

The impact of monetary easing is likely to have a positive effect on the Brazilian economy in the long run. As for valuations, Traver expects Latin America and its individual countries to continue to be amongst the most attractive markets.

Power adds that interest rates are falling and are expected to fall further. The broadly balanced trade account does not impose a barrier to fiscal expansion. Power adds that capital inflows are causing the real (the currency of Brazil) to strengthen.

As for valuations, Thompson says that while the Brazilian market is not cheap, it remains on the more expensive side.

Brazils growth will be supported by a rise in commodity prices, which will be supported by its close ties with energy-hungry China.

Within the Bric universe, Tarver says Brazil is the funds most preferred country after China. The materials (30%) and energy (30%) sectorsand the companies within themare large and have a significant weighting. However, the fund also has large weightings in the financial (20%) and consumer (12%) sectors.

Tarver says that these sectors make up the largest component of Brazil’s daily market movements and can be impacted by commodity and energy prices.

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