beyondbrics

After what was looking like a so so fourth quarter corporate reporting season, the week has ended on a more optimistic note in Brazil on a mix of good company financial results and improving macro-economic fundamentals.

Latin America’s largest cosmetics company, Natura, led the way, beating forecasts with a 33 per cent increase in net profit to R$290.7m in the three months to end-December compared with a year earlier. Analysts surveyed by Bloomberg had predicted R$255.3m.

From Bloomberg:

The company’s margins on earnings before interest, taxes, depreciation and amortization — a measure of profitability — rose 7 percentage points from the same period last year to 30 per cent.

Natura’s impressive margins were the first in a series of better Brazilian corporate results after a disappointing end to the year from national oil company Petrobras and unexciting fourth quarters from miner Vale and bank Itaú Unibanco.

The benchmark Bovespa index was pushed to a nine-month high by stronger results from Natura as well as Ultrapar, the petrochemicals group, Telefonica Brasil and homebuilder MRV Engenharia & Participações.

Stocks of the builders, in particular, benefitted from improving economic news, with indications that inflation is under control even as unemployment continues to scrape along at record lows.

Decelerating inflation has got economists and stock market traders thinking – could Brazil get the benchmark Selic rate, which was as high as 12.5 per cent, down into the lower single digits this year? That would set the economy back firmly on a growth path.

This from Goldman:

On current trends and on the basis of daily price surveys, we now believe that IPCA inflation will decline to 0.45 per cent in February, thus further reducing the year-on-year IPCA inflation rate below 6.0 per cent in February. We also believe that inflation will remain low in March. Therefore, we believe that COPOM [the central bank monetary policy committee] will maintain its plan to firmly cut SELIC below 10 per cent. We believe that COPOM will cut SELIC to 9.5 per cent in April, but if inflation remains low, it may cut it deeper, perhaps to as low as 8.5 per cent by mid-year.

Is there a potential downside? Of course. The same factors that led to over-heating in the Brazilian economy and sparked the last set of rate rises – lack of infrastructure, heavy consumer borrowing, lack of skilled labour – are all still there. Again from Goldman:

The main risk to this strategy is that while current inflation rates are encouraging, the pace of economic activity is accelerating and labor markets are quite tight. Therefore, the risk is that inflation may rebound after its seasonally monthly lows in June-July.

But should we be worrying about all this now? No, Carnival starts tonight. Let’s just enjoy the moment.

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