Itaú BBA - Heterogeneous Rebound

OrangeBook

< Volver

Heterogeneous Rebound

noviembre 5, 2012

Anecdotal information on current economic conditions received from key business contacts.

With information through November 01, 2012

This report, published six times per year, summarizes anecdotal information on current economic conditions received from key business contacts, economists, market experts, and other sources outside Itaú. Apart from the “our view” section, it is not a commentary on the views of Itaú’s Macroeconomic Research team.

Contents

Consumption and Production of Goods and Services
Different sectors report a pickup in sales between late 3Q12 and early 4Q12. However, the sustainability of the activity recovery is still uncertain.

Investment
The current rebound in demand conditions hasn't yet encouraged a broad-based investment pickup.  

Real Estate
Real estate market is reported as subdued. Sales speed is moderate and not enough to absorb still-high inventories.

Commodities
Agricultural activity is strong, pushed by favorable grain prices. In the metal commodity segments, growth remains moderate.

Labor Market, Wages and Prices
Most sectors still find difficulty to hire workers. Within consumer goods, strong competition continues to prevent price hikes.

Our View
The rebound in Brazilian economic growth has gained momentum in recent months. But uncertainty remains high.


Summary

There is a widespread perception that the economy has reverted its deceleration trend. Different sectors linked to consumption have reported a pickup in sales between late 3Q12 and early 4Q12. However, the sustainability of the activity rebound is still uncertain. Concerns about consumer indebtedness have been mentioned frequently. There are also worries about the possibility of government incentives draining demand from sectors not directly benefited.

Activity in the service sector remains solid.

The current rebound in demand conditions hasn’t yet encouraged a broad-based investment pickup. Risk aversion prevails in many sectors. The scenario for heavy vehicles, especially trucks, has improved since our last “Orange Book” in August, although the level of sales remains low.

The real estate market is reported as subdued. Sales speed is moderate and not enough to absorb still-high inventories. Demand for smaller properties is gaining strength. Participants in the sector consider this as a sign of low interest rates pushing up investment in real estate.

On commodities, agricultural activity is strong. Favorable prices and costs under control, particularly for fertilizers, increase profitability for soybean, corn, rice and bean farmers. In other commodity segments, particularly steel, mining and chemicals, growth remains moderate.

In the labor market, most sectors still find difficulty to hire workers. Strong competition continues to prevent price hikes, even among sectors that have received stimulus from import restrictions.

Our view:The rebound in Brazilian economic growth gained momentum. We see an improvement in fundamentals and evidence of broader-based growth. But uncertainty remains high. To sustain the recovery, investment must pick up, which is still a challenge.

Consumption and Production of Goods and Services

There is a widespread perception that the economy has reverted its deceleration trend. Different sectors have reported a pickup in sales between late 3Q12 and early 4Q12, including the clothing, autos, foods and beverages. The latter, in particular, has benefited from a warmer-than-usual spring. Some service industries are also enjoying more activity, after weakening demand in the first half of the year. The pace of recovery, however, is different across regions and product lines in the same industry. Sales performance has been better in the North/Northeast and for premium lines.

However, the sustainability of the activity rebound is still uncertain. Concerns about consumer indebtedness have been mentioned frequently. There are also worries about the possibility of government incentives draining demand from sectors not directly benefited. Thus, signs of rebounding demand will not necessarily lead to an across-the-board improvement in production.

The electric-electronic and furniture industries report that the slowdown is stabilizing, but see no rebound, probably due to their links to the real estate sector, which remains relatively weak (see further details below). Home appliances, benefited by the extension of the reduced IPI tax, continue to increase sales at a good pace, albeit less so than in the beginning of the year.

The IPI tax cut for automobiles accelerated sales in the third quarter and triggered a gradual rebound in output. Demand, however, still looks unstable. October was disappointing and the sector is not optimistic about sales during the holidays. Extensions of the IPI tax cut are unlikely to give an additional boost to sales. The end of the benefit, however, may cause significant damage. Motorcycle sales are still the negative highlight in the vehicle segment.

Difficulties reported by consumer-oriented sectors are high labor costs, and elevated store-rental costs (particularly in shopping malls). Logistics difficulties are becoming more evident, especially when one looks at the difference in sales across regions. The weaker real reduces competition with imports, relieving pressure on manufacturers of domestic consumer goods. However, it also has a negative effect on importers and service industries that rely on imported equipment.

Activity in the service sector remains solid. Overall, the sector saw only a soft slowdown in the first quarters of the year. There was no deceleration for those providing essential necessities such as food out of home and hospitals, and those related to structural needs such as education, security and logistics. The last also had an added boost from the pickup in grain production and exports (a result of favorable prices in international markets). The approaching soccer World Cup brings more demand to media, advertising and event companies.

In the tourism segment, the weak global economy reduces travel by foreigners to Brazil. However, Brazilians continue to travel more than they have in the past, both inside Brazil and abroad. The occupancy rate in hotels remains near maximum capacity.

From the structural point of view, the expanding middle class still gives key leverage to many segments such as personal care, specialization coursework and gyms, which have been launching service lines geared toward this market.

Investment

Business confidence has shown slight signs of recovery. Our indicator, calculated from a survey of a broad base of clients, has been stagnant since mid-2011. The “expectations” sub-group points to cautious optimism, associated with the expectation of better economic conditions in coming quarters.

The current rebound in demand conditions hasn't yet encouraged an investment pickup. Some companies are skeptical on the sustainability of demand recovery. Others still digest excessive investment made in 2009/10. Risk aversion prevails in many sectors.

Manufacturers of capital goods report improvement in orders in some product lines (such as those oriented towards agriculture), and stagnancy in others (such as construction). Lower-than-expected volumes of public works this year led to delinquency and high inventories in the sector. Low interest rates in the BNDES’s investment-sustainability program (PSI, in Portuguese) are stimulating demand, but more modestly than in similar conditions seen in 2009.

The outlook for public works is positive for 2013, with the proximity of the World Cup and public-private partnerships in infrastructure investments.

Government measures to protect local manufacturers have an ambiguous effect on investment. In the short term, these measures make purchases of imported equipment more expensive (or delay them). But over time, they accelerate foreign direct investment in some sectors. This effect is particularly important in the current context of a global demand crisis, in which access to the Brazilian market makes it worth changing the location of production.

The auto industry is an example. A new program, “Inovar-Auto”, which gives tax incentives to automakers that produce with local content, is driving automakers and auto parts producers to announce new production plans in Brazil.

Difficulties in importing input and rising outsourcing costs have pushed companies to invest in production integration.

In the heavy vehicles segment, especially for trucks, the scenario has improved since our last “Orange Book”, although the level of sales remains low. Sector predicts a “good” 2013. Subsidized interest rates from the PSI are of particular benefit to this sector, and the lack of adequate fuel for the new Euro 5 production technology (which became mandatory in Brazil) has been almost entirely corrected. The conservative stance by transportation companies – due to caution regarding the rebound in growth or due to high debt levels in some of them – hinders a stronger pickup in the short term truck orders. Over time, however, the age of the Brazilian fleet (around 18 years, on average) ensures support for underlying demand.

Real Estate

Real estate market is reported as subdued. The sector hasn’t yet felt the economic recovery. Sales speed is moderate and not enough to absorb still-high inventories. Demand has been more selective, gaining strength for smaller properties. Participants in the sector consider this as a sign of low interest rates pushing up investment in real estate.

Current production is modest, which is consistent to the low demand seen by suppliers to the construction sector, such as producers of paint, furniture and plumbing pipes and fittings. Competition with Chinese products became more intense this year.

The weakness in the sector is pushing the less-experienced investors away from the market, reducing competition and resulting in a positive longer-term outlook for consolidated companies, particularly in an environment of lower interest rates and longer financing maturities. The expansion of the “Minha Casa Minha Vida” govern program is another positive factor fort the medium term.

The sector dismisses the possibility of a bubble in the market. Property prices are higher, both because construction costs have increased and due to a vast repressed demand for real estate.

Regarding costs, prices for land plots at good locations, which are rare in large cities, take a toll on enterprise values. Labor remains expensive, while restricted demand limits the increase in prices. Thus, the sector has been operating with tighter margins.

Commodities

Agricultural activity is strong. Favorable prices and costs under control, particularly for fertilizers, increase profitability for soybean, corn, rice and bean farmers. Weather has been in line with expectations and the planting of the 2012/2013 crop should proceed normally. The advance in production will be limited only by land restrictions (as soybeans tend to be prioritized).

For cotton, there is a declining trend for global prices in 2012/13, with inventories at record levels. The cultivation area in the country should decline 27.4% in the 2012/13 crop. High soybean prices will drive producers to cultivate this grain instead of fiber; all producing states will plant less cotton. Production should decline some 20% in 2012/13.

In the sugar and ethanol segment, the planted area is expected to increase. Higher sugarcane production should go toward the production of hydrous ethanol, as sugar-refining capacity is near its limit, just as is the capacity to transform hydrous ethanol into the anhydrous product. With the crisis that has been affecting the sector since 2008, several plants stopped operating. In 2012 alone, 14 plants in the country interrupted operations.

The pickup in the agricultural sector is buoying sales of crop protections, fertilizers and agricultural machinery.

In other commodity segments, particularly steel, mining and chemicals, growth remains moderate, because of still-weak growth of construction activity in Brazil and abroad. A weaker and stable currency and government policies to boost local output help to support activity and improve the profitability of exports.

Labor Market, Wages and Prices

Most sectors still find difficulty to hire, especially skilled workers. Hiring unskilled workers became somewhat easier, particularly in segments with greater pricing power, such as services.

On average, wages are rising by 7% - 8% in nominal terms. Overall, the perception is that productivity gains are not keeping up with real wage increases.

In consumer goods markets, strong competition continues to prevent price hikes, even among sectors that have received stimulus from import restrictions. Companies seek to increase efficiency and reduce costs. However, there are no substantial layoff plans.

Following a sharp lift in the third quarter, the outlook for retail food prices is stable in the next few months. Strong crops, along with logistics difficulties for exports, may lead to excess domestic supply for some products, such as corn. Stability is also expected for animal protein prices, and this sector already operates with elevated prices and wide margins.

Our View

The rebound in Brazilian economic growth has gained momentum in recent months. We see an improvement in fundamentals and evidence of broader-based growth.

But uncertainty remains high. Risk aversion is elevated among companies and investors. Risks for fourth-quarter growth prevail. The contribution from the auto sector – which was essential for third-quarter GDP – will likely be smaller. To sustain the recovery, investment must pick up, which is still a challenge.



< Volver