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Cablegate: Brazilian Stock Exchange Index Breaks Record

VZCZCXRO5709
PP RUEHRG
DE RUEHSO #0819 2761723
ZNR UUUUU ZZH
P 031723Z OCT 07
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC PRIORITY 7551
INFO RUEHBR/AMEMBASSY BRASILIA 8660
RUEHRG/AMCONSUL RECIFE 3823
RUEHRI/AMCONSUL RIO DE JANEIRO 8374
RUEHBU/AMEMBASSY BUENOS AIRES 2892
RUEHAC/AMEMBASSY ASUNCION 3131
RUEHME/AMEMBASSY MEXICO 0817
RUEHMN/AMEMBASSY MONTEVIDEO 2460
RUEHSG/AMEMBASSY SANTIAGO 2162
RUEHLP/AMEMBASSY LA PAZ 3509
RUCPDOC/USDOC WASHDC 2920
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEHRC/USDA FAS WASHDC 0697

UNCLAS SAO PAULO 000819

SIPDIS

SIPDIS
STATE FOR WHA/BSC, WHA/EPSC
STATE PASS USTR FOR KATE DUCKWORTH
STATE PASS FED BOARD OF GOVERNORS FOR ROBITAILLE
STATE PASS EXIMBANK
STATE PASS OPIC FOR DEMROSE, NRIVERA, CMERVENNE
NSC FOR TOMASULO
TREASURY FOR JHOEK
USDOC FOR 4332/ITA/MAC/WH/OLAC
USDOC ALSO FOR 3134/USFCS

E.O. 12958: N/A
TAGS: EFIN ECON BR
SUBJECT: BRAZILIAN STOCK EXCHANGE INDEX BREAKS RECORD

REF: SAO PAULO 709

1. On September 27, the primary index on Brazil's stock exchange
surpassed 60,000 points for the first time in its history. The
Ibovespa, the main indicator of the Brazilian stock market's average
performance, gained nearly 11 percent in the month of September, and
is up 36 percent in 2007. It is the only Latin American index to
recover all its losses in the wake of the August U.S. sub-prime
credit crisis (reftel).

2. A rush of foreign capital is contributing to the Ibovespa's rise
as investors seek to take advantage of growth in emerging markets.
Executives from Banco Itau and Unibanco, two of Brazil's largest
banks, pointed to turmoil in the U.S. and Europe as one of the
primary drivers for an increase in foreign portfolio investment
particularly in emerging markets such as Brazil. Brazil is an
attractive option because of high commodity prices, the strength of
the currency (Real), and the view that the growth of the Brazilian
economy is stable and may be accelerating. In the first three weeks
of September alone, foreign portfolio investment in the Brazilian
stock market totaled approximately USD 970 million.

3. Bank representatives stated that they remain optimistic for
further growth of the Ibovespa as they view Brazilian stocks as
undervalued. They estimated that Ibovespa would continue to climb
in coming weeks until reaching 65,000 points, when investors could
begin to sell off their investments, which would cool the overall
growth of the market. Their collective forecast for the year-end
Ibovespa performance is on the order of 63,000 which would result in
an end of year performance of 39 percent for 2007.

4. A research analyst at Morgan Stanley also informed Econoffs that
during a recent series of meetings with clients in Europe and the
U.S., investors displayed very high levels of confidence in Brazil
and see strong economic fundamentals and growing domestic demand as
driving future growth in the country. In addition, the analyst
pointed out that Mexico and Argentina did not have the confidence of
investors which may also be contributing to larger inflows of
investment into Brazil as investors seek to invest in those emerging
markets with the most sound fundamentals and prospects for positive
returns.

5. Comment: Although the consensus suggests that Brazil's positive
stock market performance is here to stay, Brazil is entering
uncharted territory. While low inflation, interest rates
approaching single digits, and an exchange rate beneath the
psychological barrier of USD 2 to 1 Real point to continued positive
returns in the Ibovespa, much of this rise is due to foreign
investment which is highly agile and can move quickly. While there
remain concerns over the lack of reforms, infrastructure obstacles,
a less than friendly business environment, and other economic
challenges, the overall sense seems to be that the lack of reforms
in these areas is merely a missed opportunity and is not of
overriding concern for the near term. End Comment.

6. This cable was coordinated with Embassy Brasilia.

WHITE

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