BRAZIL: OPPORTUNITIES IN TROUBLED MARKETS

LUIZ FERNANDO FIGUEIREDO

2

FX: Are we in the 2002 path?

FX depreciation has been even more agressive this time than it was in 2002. But there are crucial differences:

a) Today, Public Debt as % of GDP goes down with FX depreciation

(2002 was the opposite);

BRL/USD

2

2.2

2.4

2.6

2.8

3

3.2

3.4

3.6

3.8

4

-3 -2 -1 0 1 2 3 4 5 6 7 8months

1.45

1.65

1.85

2.05

2.25

2.45

2.65

2.85

2002 (LHS) 2008 (RHS)

Net Public Debt as % of GDP

35.0

40.0

45.0

50.0

55.0

60.0

-3 -2 -1 0 1 2 3 4 5 6 7 8Months

2002

2008

forecast

3

FX: Are we in the 2002 path?

b) Less deflacionary this time, since Commodity Prices are falling;

c) External Accounts are considerably more balanced

CRB Cmdty Index

210

215

220

225

230

235

240

245

250

-3 -2 -1 0 2 3 4 6 7 8

meses até a depreciação

400

410

420

430

440

450

460

470

480

2002 (lhs)

2008 (rhs)

External indebtedness indicators 2001 2002 2004 2006 2008

Total external debt / GDP (%) 41.2 45.9 30.3 16.1 14.0

Net total external debt / GDP (%) 31.9 35.9 20.4 7.0 - 1.1

Debt service / exports (%) 84.9 82.7 53.7 41.3 20.6

Reserves / short-term external debt 66.7 64.6 99.3 211.7 292.7

Total external debt/exports (ratio) 3.6 3.5 2.1 1.3 1.1

Current account/GDP (%) - 4.2 - 1.5 1.8 1.3 - 1.5

FDI/GDP (%) 4.1 3.3 2.7 1.8 2.2

Real Interest Rates

Quite high by any standard

Real Interest Rate (NTN-B 2015)

9.65

5

6

7

8

9

10

11

May-06

Jul-06

Sep-06

Nov-06

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

% p

.a.

The Brazilian stock market underperformed, despite solid macroeconomic fundamentals

MSCI Index avg PE

6

8

10

12

14

16

18

2003 2004 2005 2006 2007 2008

WORLD EM BRAZIL LATAM

Even though companies did take advantage of the bull market’s abundant liquidity, they are being penalized on a relative basis. Foreign outflow is contributing to exaggerated movements.

Brazil once again is being traded at a discount when compared to Latam, EM and World P/Es.

Source: Bloomberg, Economática, Bovespa

Total Debt / Market Cap

0%

20%

40%

60%

80%

100%

120%

2002 2003 2004 2005 2006 2007 2008

Companies are unlevered

Foreing Cumulative Flow (since J an/ 04)

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

Jan-0

4

May-0

4

Sep-0

4

Jan-0

5

May-0

5

Sep-0

5

Jan-0

6

May-0

6

Sep-0

6

Jan-0

7

May-0

7

Sep-0

7

Jan-0

8

May-0

8

Sep-0

8

US$ mm

Brazilian banks are less exposed to the crisis because :

(1) They are not exposed to the subprime market

(2) There is not the issue of being “too big to be saved”

(3) Housing credit still low as % of GDP.

Sectors, such as financial, are being excessively penalized due to the global credit crisis

Source: Financial Times, Company Data, Banco Central do Brasil, Mauá Consultoria

Housing credit in Brazil as % of GDP

2.1%

1.4%

1.5%

1.6%

1.7%

1.8%

1.9%

2.0%

2.1%

2.2%

Jan-0

5

Apr-

05

Jul-

05

Oct

-05

Jan-0

6

Apr-

06

Jul-

06

Oct

-06

Jan-0

7

Apr-

07

Jul-

07

Oct

-07

Jan-0

8

Apr-

08

Jul-

08

Seeking comfort in valuation: even stress testing our base case scenario, upside is attractive

Source: Bloomberg, Company Data, Mauá Consultoria

MSCI BRZ - FINANCIALS

56789

101112131415

Dec-

03

Apr-

04

Aug-0

4

Dec-

04

Apr-

05

Aug-0

5

Dec-

05

Apr-

06

Aug-0

6

Dec-

06

Apr-

07

Aug-0

7

Dec-

07

Apr-

08

Aug-0

8

Average historical multiple: 10.9

Stressing the scenario for one of the banks under our coverage shows that worst case equals banks trading at average historical P/E, considering maintenance of spreads.

Stress Test for Bradesco2008

Base Crisis Bear Base Bull

Brazil GDP 5.1% 1.5% 2.0% 3.0% 4.0%

Loans growth +23% -10% 0% +10% +15%Bad debt provision 4.8% +300bps +200bps +120bps +80bpsP/ E 10.1 9.4 8.7 8.3

ROE 24.5% 19.7% 21.0% 22.6% 23.5%Upside 1% 28% 39% 44%

2009