Some Brazil Sectors Still At Risk Despite Forex Shift-Deutsche Bank

Some sectors of Brazil's economy could continue to face the risk of a slow recovery ahead despite improved foreign-exchange market conditions for local companies, strategists at Deutsche Bank said Friday.

In a research report titled "Latam in the Shadow of the Eurozone Crisis," Deutsche Bank said traditionally reliable plays in the Brazilian market such as the materials and banking sectors could see difficulties owing to depressed commodities prices and financial fallout from events in Europe.

"Ultimately, financial and commodity stocks will be most impacted by a Europe meltdown as well as more leveraged companies dependent upon external financing with short-term maturities," the bank said.

The industrial sector, however, should maintain some resilience as the Brazilian government seeks to protect local jobs and income in an environment of global turbulence.

"We continue to see Brazilian industrials as benefiting from government policy, a shifting macro environment with a weak real, falling rates and compelling valuations," Deutsche Bank said. "Our favorite names include Embraer (ERJ), Iochpe (IOCJY), Randon (RAPT4.BR), and Mahle Metal Leve (LEVE3.BR)."

Falling Brazilian interest rates should also encourage proxies for fixed-income investments, such as utility sector investments in companies like Cemig (CIG), Light (LIGT3.BR) and AES Tiete (GET14.BR).

Deutsche Bank, however, cautions investors not to get too excited over the potential for strong gains on cheaply valued local shares in dollar terms as the government and central bank, it notes, are likely to defend the current exchange rate of around two Brazilian reais to the dollar through market intervention such as swap auctions.

-By Gerald Jeffris, Dow Jones Newswires; [phone]; [e-mail]