Reuters: US Dollar Report: Economic stimulus to help Brazil industrial stocks

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Economic stimulus to help Brazil industrial stocks Apr 4th 2012, 15:55 Wed Apr 4, 2012 11:55am EDT * Industrial stocks have rallied in anticipation of policies * Rousseff to spend 1.5 pct of GDP to bolster industry * Analysts see Randon, Embraer, Hypermarcas as main winners * Some gains already priced in * New tax on beverages, cigarettes to hurt AmBev, Souza Cruz By Guillermo Parra-Bernal SAO PAULO, April 4 (Reuters) - Investors who bet that Brazilian President Dilma Rousseff would take bold steps to help ailing manufacturers are likely to get a nice payoff as their holdings of industrial stocks bounce higher in the foreseeable future. Capital goods maker Iochpe Maxion, generic drugmaker Hypermarcas and planemaker Embraer are among the companies that will benefit from the 60.4 billion reais ($33 billion) package of tax cuts and low-cost loans aimed at reviving a flagging industrial sector. The extension of subsidized loans by state development bank BNDES and the elimination of a payroll tax will boost industrial stocks in the short term, JPMorgan Securities said. Rousseff wants to revive the ability of factories to create well-paid jobs - the main engine behind Brazil's emergence as a global economic heavyweight over the past decade. The rally in those shares should continue, even as the measures fail to end the bottlenecks that have long made industrial companies less competitive in Brazil. Manufacturers in Latin America's largest economy have reeled from what is known here as the "Brazil cost," a mix of high taxes, stifling bureaucracy, unskilled labor and insufficient investment in infrastructure. "The plan is basically throwing a lifeline to these companies," "said Roseli Machado, who oversees 5.3 billion reais in equities for Fator Administradora de Recursos in São Paulo. "In the long run, these policies will only help companies that work toward obtaining significant productivity gains." A basket of seven industrial stocks gained an average 11 percent in the past month and 56 percent since October, when the government began signaling it would take steps to protect local factories against surging imports and exporters' eroding share in key export markets. "Such gains were partly possible because some investors foresaw the government's actions," Machado said. "The question is how long the rally will last." Policy activism has helped bolster industrial stocks in the past. In the aftermath of the global financial crisis of 2008 - which pushed Brazil into a short-lived recession - massive aid to manufacturers spurred an 88 percent gain in share prices for the same seven stocks in 2009 and an additional 36 percent jump the following year. Though welcomed by Brazilian industry as helpful, the package was criticized by economists and business leaders as falling short of the broad reforms necessary to ease the high tax burden and excessive red tape. The moves are the second such stimulus package for ailing industries since the country's previously red-hot economy began to cool in mid-2011, hit by fallout from Europe's sovereign debt crisis and slower growth in China. Brazil will spend 1.5 percent of gross domestic product on the package. According to Emy Shayo, a São Paulo-based strategist with JPMorgan Securities, the government understands that "it is industry that can add value to raw materials, increasing Brazilian exports." Analysts said a government injection of 45 billion reais into BNDES coffers could have the most significant impact on the revenue and cost structure of manufacturers. Corporate credit in Brazil is the costliest among the world's 20 biggest economies. "In this sense, the market's perception on all industrial names should improve, though it may be partially priced in by now, given the outperformance seen in the last couple of weeks," Luis Vallarino, a São Paulo-based industrial goods analyst with Citigroup Global Banking & Markets, wrote in a note to clients. WINNERS VS LOSERS Since a global slowdown brought Brazil's economy to a near-standstill late last year, policymakers have been taking incremental steps to revive it. But after five consecutive interest-rate cuts, a rise in import taxes on cars, and a series of measures designed to curb the appreciation of Brazil's currency, a recovery is far from clear. Vallarino said that bus-maker Marcopolo, capital goods producer Randon Participações and electrical equipment maker WEG should be the largest beneficiaries of the package, which will lower financing and payroll costs. JPMorgan's Shayo said that a government pledge to foster the purchase of Brazilian-made goods over foreign rivals, even if the former are 25 percent more expensive than the latter, should boost sales of pharmaceutical goods, benefiting Hypermarcas. Last week, Hypermarcas and three rival drugmakers announced the creation of a research and development company specializing in biotechnology, in a first step to lessen the Brazil's reliance on foreign pharmaceutical laboratories. Brazil, which spends billions of dollars annually on purchases of medicines and supplies for the production of drugs, is increasingly using its bargaining power to curb foreign presence in the market. Exporters like Embraer, the world's third-biggest maker of commercial aircraft, should also feel some relief after the government agreed to replace a 20 percent tax on payroll with a 1 percent to 2 percent levy on gross revenue. Embraer earns most of its revenue in U.S. dollars but has 40 percent of costs, mostly payroll, linked to Brazil's currency. Embraer jumped 4 percent to 15.19 reais on Wednesday, the highest in almost four years. But there could be some losers too. A new levy on alcoholic beverages was announced to help compensate for lost tax revenue, which could hamper AmBev , the nation's largest brewer, unless it raises prices. Cigarettes will also be the subject of a tax increase, potentially weighing on share performance for Souza Cruz . Souza Cruz rose 0.9 percent, while AmBev tumbled 2.9 percent in early afternoon trading. Link this Share this Digg this Email Reprints

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