Brazilian equities continue their year-to-date climb, despite fears of inflation spurred by the country's central bank. Halfway through trading, the country's principal stock index, the Bovespa (INDEX: ^BVSP) , is up 0.59%. For the year, it's higher by an impressive 6.5%.
Signs that Brazil is overheating
Similar to the situations in Europe, Japan, and the United States, policymakers in Brazil have pursued an aggressive monetary policy designed to spur economic growth since the onset of the financial crisis. Over the past 13 months alone, its central bank has cut the benchmark interest rate by 500 basis points to a record low of 7.5% and, two weeks ago, it reduced banks' reserve requirements to free up an additional $14.8 billion in credit.
These moves have translated into a number of positive economic developments. According to Bloomberg, July retail sales in the country beat economists' forecasts and rose at the second-fastest pace since January. In August, monthly vehicle sales rose to a record 420,101. These two things, combined with rising global commodity prices, drove Brazil's unemployment rate down to 5.3% last month, the lowest ever for August.
Yet, unlike the West, there are now fears that these moves may have been too successful, spurring an unacceptably high rate of inflation in South America's largest economy. Economists surveyed by the country's central bank recently raised their forecast for 2012 inflation to 5.35%, from 5.26%. This is notably well above the bank's target rate of 4.5%. And, as a result, it was revealed today that economists now see the central bank holding rates steady for the remainder of the year.
Brazilian equities hold the line
The possibility that policymakers are at the end of the rope in terms of stimulus has had little noticeable effect on Brazilian stocks thus far today. Of the 27 Brazil-based companies that trade on U.S. exchanges, 16 are up in intraday trading, while only 11 are trending lower.
Leading the way higher is regional airline GOL Linhas (NYS: GOL) , up by nearly 4%. Gol operates as a low-cost and low-fare airline connecting various cities around Latin America to Brazil. According to a recent presentation to investors, the company operates 120 aircraft flying 810 flights per day, has a 37% share of the Brazilian market, and carried over 35 million passengers in 2011. Needless to say, low unemployment and higher consumer spending is a coup for a company like this.
Gol's performance is particularly notable because the country's largest aircraft manufacturing, Embraer SA (NYS: ERJ) , is one of the worst-performing Brazilian stocks, down more than 1.6% on the day. Ankit Agrawal, a member of The Motley Fool Blog Network, nevertheless calls Embraer a cheap stock with ample growth drivers:
Brazil represents 54% of Embraer's total defense sales. The Brazilian Ministry of Defense seeks to match the other BRICs and protect its natural resources including the Amazon rainforest and offshore oil reserves. Therefore, they are calling for an increase in its defense budget from 1.5% of GDP currently to 2.3%. As a result, I see several years of double-digit organic growth for Embraer's defense business (15% of total 2012 revenues) given drivers like SISFRON border security system and satellite for the Brazilian Army.
Another favorite among investors is Companhia de Bebidas das Americas (NYS: ABV) . Better known as "Ambev," this is the third largest Brazilian stock trading on U.S. exchanges measured by market capitalization. While shares in the company are trading down by 0.36%, this is a well-known defensive play with respect to the South American economy. According to Calla Hummel, another member of our Blog Network:
[Ambev] is one of the -- if not the -- highest quality stocks in Brazil. [It] sells Brazil's most popular soft drinks and beer, as well as Argentina's, Uruguay's, and Bolivia's, all countries where soft drinks or beer accompany nearly every meal. [It] sells seven of every ten beers in Brazil....
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The article High Inflation Doesn't Slow Brazilian Stocks originally appeared on Fool.com.Fool contributor John Maxfield does not have a financial position in any of the companies mentioned above. Motley Fool newsletter services have recommended buying shares of Embraer. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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