A-list message, [A-List] Soothing Lula

Dow Jones Business News
Brazil Assets Recovering As Market Warms To Workers' Party
Thursday October 24, 1:26 pm ET
By Anthony Dovkants And Terry Wade, Of DOW JONES NEWSWIRES

SAO PAULO -(Dow Jones)- Brazilian financial assets are finally showing signs
of life as investors warm to market-friendly comments from the likely next
administration and improving U.S. market sentiment.

Brazil's risk perception among investors soared in recent months, sending
asset prices sharply lower, as left wing presidential candidate Luiz Inacio
Lula da Silva maintained a sizable lead in pre-election polls.

But as Sunday's final vote approaches, recent pledges from the frontrunner's
Workers' Party that it would adhere to fiscal discipline, go outside the
party to fill key economic posts, support central bank autonomy and take
steps to strengthen capital markets have helped soothe frayed nerves.

"The Workers' Party is telling investors what they want to hear, while
better corporate results in the U.S. have helped stocks there," said Alan
Gandelman, a director and fund manager at local brokerage Agora Senior.

Stocks have been the biggest beneficiary, as the solid performance of U.S.
equities has helped underpin an 18% gain over the past five sessions for
Brazil's main stock index, the Ibovespa. Early Thursday afternoon, the index
was up another 2.3%, above the psychologically important 10,000 points
barrier for the first time since Sept. 16.

"The investor is finally starting to understand the difference between the
Workers' Party's campaign promises and how it plans to govern the country
economically," said Marcelo Mesquita, equity strategist for UBS Warburg in
Rio de Janeiro.

Though Lula's campaign rallies are full of promises to boost social
spending, investors are starting to believe his vows that he will take a
moderate tack on managing the economy, Mesquita added.

Stocks are gaining across the board and foreigners appear to be responsible
for much of the buying, UBS said Thursday.

Despite the recent surge, the index is down 27% for the year. In dollar
terms, according to the Morgan Stanley Capital International index,
Brazilian shares are down 46% year-to-date.

Energy and telecommunications shares have been hit harder this year and
their comparatively lower prices have allowed them to slightly outperform
other sectors in the recent rally. Telecoms have been hurt by bankruptcies
in the U.S. and heavy debt loads. Power companies, also saddled with debt
obligations, are still recovering from a nine-month energy rationing program
that ended in February.

Bellwether stock Tele Norte Leste Participacoes SA , the country's largest
telecom, improved 22% over the week to Wednesday's close. Meanwhile, power
heavyweight Centrais Eletricas Brasileiras SA , or Eletrobras, increased
29%.

Gains have been less pronounced for banks. While they serve as a barometer
of the nation's economy during a period of increasingly sluggish growth,
investors have worried lately that a Lula government could order banks to
jack up rates on savings and lower the cost of borrowing for lenders. Such
moves would hurt banks' operating income.

Shares in Banco Bradesco SA and Banco Itau SA - the nation's top two private
sector banks - rose 17% and 19%, respectively, over the past week.
Elsewhere, state-run oil giant Petroleo Brasileiro SA advanced 20% during
the period.

Among fixed-income assets, the Capitalization Bond - Brazil's benchmark
external debt instrument - rose 12% over the past week, closing Wednesday at
55.2 bid.

The beleaguered local currency, the real, has also gained modest ground,
though remains under significant pressure amid an external credit crunch as
banks look to profit on dollar-denominated debt maturities. The currency has
lost 40% of its value this year, but has recovered about 5 centavos over the
past week and is now trading at around BRL3.87 per dollar.

Looking ahead, much still depends on whether Lula, as the former union
leader is known, is quick to unveil a market-friendly cabinet. Investors are
also eager to hear what the party will say Monday, when it is scheduled to
announce an economic-reform program looking at issues such as long-delayed
overhauls of the tax and pension systems.

Market confidence will be critical for the outgoing government to
successfully manage a heavy debt rollover schedule for the remainder of the
year.

"The real will be driven more by upcoming maturities of dollar-linked
government paper and swaps," said Doug Smith, chief economist for Americas
Global Research at Standard Chartered Bank. There are maturities of about
$4.7 billion in the month of November and about $3.7 billion in December.

Analysts said the direction of stocks will, in large part, continue to be
driven by the performance of the country's bonds and currency. If Lula can
successfully overcome market worries about a credit event, analysts have
said the Ibovespa index could finish the year near 13,000 points.

-By Anthony Dovkants and Terry Wade, Dow Jones Newswires; 55-11-3145-1478;
brazil@xxxxxxxxxxxx (Rogerio Jelmayer contributed to this article)