Allocation Brazil. Optimism May Prevail at Last. Strategy / Brazil. Suggested Portfolio January/11

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1 Strategy / Brazil Allocation Brazil Optimism May Prevail at Last Amid old concerns, the US gives signs of improvement The New Year will begin in the same way 2010 is ending: full of doubts. However, a more positive mood is emerging in relation to the international economy, at least for the near future. A tendency towards a solid recovery of the US economy particularly reflects this sentiment. Thus, although markets continue to monitor closely the rolling of sovereign and bank debts in Europe, pay particular attention to economic growth in Germany and inflationary trends in China, during January 2011, US economic indicators will probably dominate the spotlight, as analysts seek to confirm signs of a stronger growth. The implementation in the US of the fiscal package that maintains tax breaks for personal taxpayers, recently agreed to between the Obama Administration and Congress, supports this optimism. Also, various economic indicators have shown improvement and the overall data pointing to an increase in the speed of recovery is indeed impressive, although in some cases this is slow and in others apparently only transitory. For example, personal consumption has grown consistently in the last few months and growth recorded in October and November indicates that in 4Q10 the increase in the consumption component of GDP may surpass 3% for the first time since The figures in the indicators of industrial and service activities - ISM Manufacturing and ISM Non-manufacturing also give grounds for confidence in a faster growth for Even the labor market has shown some signs of life. Indeed, excluding the surprisingly disappointing payroll data for November, nearly all market indicators have revealed improvements, particularly the drop in weekly jobless insurance claims since the middle of November. We expect a calm local scenario, with confirmation of the interest rate hikes foreseen for the next months In Brazil, the minimum wage is set and all signs point to the Central Bank starting a cycle of hikes in the Selic interest rates in January. This should leave the short-term picture clearer. Our basic scenario points to three further hikes of 0.5% in subsequent COPOM meetings, a total rise of 2.0%, maintained until mid Additionally, the installation of a new administration always brings hopes of further structural advances. However, several uncertainties cloud the medium-term horizon, such as, for example, questions on how the new Government will conduct its fiscal policy. We believe that, despite the positive signs expected locally and in the US, a seasonally weak stock market in January will not allow the Ibovespa to recover consistently. Instead, it is likely to continue volatile, but moving sideways. Faced with this, we have not changed our portfolio in terms of the names included. We have only re-balanced weights by reducing the weights for Vale and PDG Realty (from 20 to 15% and from 10 to 5%, respectively) and increasing the weights for Telesp and MRV (both from 5 to 10%). Suggested Portfolio January/11 LONG/OVERWEIGHT Stock Ticker Traded Vol.* Weight % Bradesco BBDC % Hering HGTX % Lojas Americanas LAME % Lojas Renner LREN % MRV MRVE % PDG Realty PDGR % Petrobras PETR % Telesp TLPP % Tiete GETI % Vale VALE % Total - - % Source: Banif Research *Average trading volume (R$ mn) in the past 90 days Oswaldo Alcântara Telles Filho otelles@banifib.com.br Please refer to the end of the report to analyst and firm disclosures January 3, 2011

2 LONG /Overweight Suggested Portfolio Stock x IBOV Bradesco BBDC % 12.1% Catalyst: We expect a continuation of the positive trend in results reported for 9M10. ROE in 3Q remained high at 22% and insurance continued to contribute significantly to the bottom line (almost 1/3). We believe in a continuation of the high spread between the basic interest rate and rates passed through to clients. Additionally, the hikes in the Selic interest rate foreseen for the next few months reinforce our choice of a representative of the banking industry. Hering HGTX % 183.2% Catalyst Hering has maintained impressive levels of sales growth and solid results since 2008, with an impressive SSS growth of 33.6% in 3Q10. In addition, margins for EBITDA and Net Income also present expansion, as new stores are maturing quickly. The company ended 2010 with almost 340 Hering stores spread throughout 1 cities in Brazil. Furthermore, the company recently reviewed its expansion plan, and now aims at reaching 405 stores by end 2011, one year ahead of original expectations. Additionally, a recent market study indicates that the current level of demand could support at least 200 extra stores, without considering further economic growth. With a healthy cash position and stores in a format smaller than those of its competitors, we believe Hering is in a good position to achieve its objectives. Risk: the continued and high appreciation of the share over the last year poses a ST market risk. Lojas Americanas LAME % -0.9% Catalyst 3Q results surprised the market in a positive way, with a significant improvement in operational margins and a reduction of working capital needs, which boosted growth in earnings. The company reported a solid SSS growth in 2010, despite 2009 s strong comparison base and an accelerated organic expansion. Lojas Americanas opened 70 stores during 2010 (35 in 4Q10 alone), which is at the top range of its guidance and keeps the company on target to open 400 new stores in the period. Moreover, positive factors such as i) a low average sales ticket; ii) broad assortment of products; iii) penetration in all social classes and iv) nationwide presence, places the company in one of the sector s best positions to benefit from the current buoyant economy. Risks: strong competition for its subsidiary B2W in the e-commerce sector and a P/E multiple that is higher than the sector average Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Please refer to the end of the report to analyst and firm disclosures Banif - January 3,

3 LONG /Overweight Suggested Portfolio Lojas Renner LREN % 47.8% Catalyst: Lojas Renner s main challenge is to bring sales growth back to higher levels, whilst keeping margins stable. Third quarter results proved that this is feasible, with SSS returning to double digits and financial services helping to bring margins to a healthy level. Expectations are for this performance to repeat in the 4Q10. Furthermore, the company is launching new store formats, including compact street stores and even smaller stores designed exclusively for women, allowing a faster expansion to regions where the company is not yet present. Renner announced an ambitious expansion plan to open 30 stores in 2011 (20 compact) and 160 stores in five years ( compact), more than doubling its current 134 stores. Finally, another good growth opportunity comes from the e-commerce platform, which started in 4Q and will include apparel, accessories and footwear in addition to the existing mix of underwear, wristwatches and fragrances. Risks: execution risks related to the new compact store format and margin compression from pre-operating expenses of new stores. MRV MRVE % 13.7% Catalyst: For 3Q10, MRV posted an all-time high Net Revenue, EBITDA and Net Income, causing its share prices to react positively in November. However, investors started to sell in December due to rumors that the main shareholder would divest some of its holdings. This did happen, causing stock prices to tumble, which created an interesting entry point. Therefore, we are maintaining MRV3 in our suggested portfolio. PDG Realty PDGR % 18.7% Catalyst: For 3Q10, PDG released strong results and an aggressive 2011 guidance. Consequently, its stock went up in November. However, in December, investors started to sell due to fears related to potential interest rate hikes by the Central Bank. We believe that stocks dropped excessively, creating an interesting entry point. Therefore, we are maintaining PDGR3 in our suggested portfolio. Petrobras PETR % -23.0% Catalyst: PETR4 s outperformance of the Ibovespa in December almost equaled its performance against the index since the end of the capital increase in July. On a YTD basis, however, the share continues 25% below the Ibovespa. We believe that positive views on the company's multiples, which remain lower than its peers and its long-term prospects, are likely to prevail over the negative views on the company's management and investment decisions. We expect oil production and refining capacity to increase substantially, with a growing domestic market for its products. Risk: political noise regarding the change in top management. Stock x IBOV Dec-09 Mar-10 Jun-10 Sep-10 Dec Please refer to the end of the report to analyst and firm disclosures Banif - January 3,

4 LONG /Overweight Suggested Portfolio Stock x IBOV Telesp TLPP % 7.3% Catalyst: We believe the news flow on the VIVO/Telesp merger could boost TLPP4. In our view, there is a very attractive potential gain between the companies not yet priced in. Telesp's shares continue to trade at attractive multiples and high upside potential to our fair value. Risk: the merger conditions could hurt minorities. Tiete GETI % 32.8% Catalyst: We maintain Tiete in our portfolio because we expect it to continue paying good dividends in the next few years due to its premium contract to sell most of its energy to Eletropaulo. Additionally, we believe that generators should continue to present better performance than distributors in coming years. Risk: in the long-term, the company will need to sell energy through regular auctions held by the government, which could mean lower prices than those obtained in their current contract with Eletropaulo, which ends in Vale VALE % 17.2% Catalyst: We continue to have a positive view on Vale and the iron ore market. The company s 3Q results came in strongly, with record volume sales of iron ore and pellets, as well as record high Revenue, EBITDA and Earnings. Operating outlook remains positive, as iron ore fundamentals are still in place with good volumes and prices. The spot price for iron ore in China has shown an upward trend in the past month and we do not see prices below US$90-/t, given that China's average cost of US$90/ton places a floor to prices. We believe that current measures in China to reduce energy consumption will push forward the demand for high-grade ores, increasing demand for Vale s products. 3Q10 results showed an increase in revenues from non-ferrous operations, but the full impact of the end of Strikes at the Canadian nickel and copper operations will show in 4Q10. During the 3Q10 conference call, the company announced its plans to invest US$24 bn during 2011, not including possible investments via acquisitions, which it intends to use mainly for organic expansion projects. Risks: 1) global economic slowdown; 2) increase in freight rates; 3) appreciation of the Real and 4) noise relating to possible change in Vale s CEO. 1 1 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 1 Please refer to the end of the report to analyst and firm disclosures Banif - January 3,

5 Banif (LONG) x Ibovespa December In % 10% 0% -10% Banif Ibovespa Source: Economática Weighted performance in December/10 VALE5 GETI4 TLPP4 PETR4 PDGR3 MRVE3 LREN3 LAME4 HGTX3 BBDC Banif IBOV Banif - Ibov Apr % 15.55% 0.62% May % 12.49% -2.86% Jun % -3.26% -2.70% Jul % 6.41% 1.61% Aug % 3.15% 2.57% Sept % 8.90% 0.85% Oct % 0.05% 0.52% Nov % 8.93% -0.10% Dec % 1.87% -0.82% 2010 Banif IBOV Banif - Ibov Jan % -4.65% 2.08% Feb % 1.68% -0.15% Mar % 5.82% -1.52% Apr % -4.04% 0.67% May % -6.64% 3.46% Jun % -3.35% 3.10% Jul % 10.80% 1.33% Aug % -3.51% 3.93% Sept % 6.58% 0.43% Oct % 1.79% 1.88% Nov % -4.20% 2.94% Dec % 2.36% -1.48% In % 1.04% 18.77% 12M 19.81% 1.04% 18.77% 18M 66.08% 34.08% 32.00% Source: Economática and Banif - Research -2% -1% 0% 1% 2% 3% Source: Economática. Weighted performance of the stocks from the recommended portfolio Banif x Ibovespa Evolution Banif Ibovespa December November October September August July June May April March February January In M -10% 0% 10% 20% Please refer to the end of the report to analyst and firm disclosures Banif - January 3,

6 Analyst Disclaimer and Important Report Disclosures: The analysts mentioned in this report hereby certify that: 1) all of the views accurately reflect his or her personal views about any or all of the subject securities or issuers; 2) no part of any of the analysts compensation is or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research; and 3) they do not hold securities issued by the company (ies) mentioned in this report that exceed 5% of their assets. Investment ratings are a function of Banif Banco de Investimento s expectations of a relative return to the expected performance of the main index of the country of origin. Ratings are: Buy for stocks viewed as having an upside 0 bps higher than the expected performance of the index; a Neutral for stocks expected to have an upside between -0 bps and +0 bps to the expected performance of the index and; Sell for those stocks expected to have a performance 0 bps below the expected performance of the index. It is important to note that a recommendation may differ from the rating system when the analyst believes that the stock may reach the appreciation / depreciation in the very short term. Banif Banco de Investimento is not currently having any investment banking or other business connections with the company (ies) mentioned in this report, however, investors should bear in mind that it is seeking or will seek to do so at any time and may receive compensation for services provided or have commercial relations with the company(ies) analyzed in this report, or with individuals, legal entities, funds, trusts or estates that act representing the same interest as the company(ies). Banif Banco de Investimento and/or its officers, directors, or shareholders, may from time to time have long or short positions in the financial instruments of the company mentioned in this document, or may serve in an advisory capacity with respect to such instruments. This document is for information purposes only and was made by Banif Banco de Investimento. Under no circumstances should this document be used or considered as an offer to sell or a solicitation to buy the securities or other instruments mentioned in it. The information in this document has been obtained from sources believed reliable, but Banif Banco de Investimento makes no representations concerning the truth or accuracy of the content or substance of this report, or of the future market value of any securities, notes, or private claims mentioned within. Opinions expressed herein constitute the current judgment of the author as of the date published and are subject to change without notice, and Banif Banco de Investimento makes no representations that they will endeavor to update their analysis upon any change of circumstances. The products mentioned in this document is not directed to, or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Banif Banco de Investimento or its subsidiaries or affiliates to any registration or licensing requirement with such jurisdiction. Additional Information for US Readers: Banif Banco de Investimento is a registered broker-dealer. The research was prepared Non-US research analysts that are not registered or qualified as research analysts with the NYSE and or FINRA, but satisfy the registration and qualification requirements or other research-related standards of a non-us jurisdiction. Any US Person receiving this report and wishing to effect any transaction in any security discussed in this report should do so with Banif Securities, at 140 East 45th Street, 2 nd floor, New York, NY. Brasil - São Paulo Banif Banco de Investimento S/A Av. Juscelino Kubitschek, º São Paulo, SP Tel: Brasil - Rio de Janeiro Banif Banco de Investimento S/A Praia de Botafogo 228-7º Andar Rio de Janeiro, RJ Tel: Portugal - Lisbon Banif Banco de Investimento Rua Tierno Galvan, Torre 3, 14º. Lisbon, Portugal Tel : USA - Miami Banif Securities, Inc. 1 Brickell Bay Dr, Suite 2906 Miami, FL Tel: Argentina - Buenos Aires Prisma Investment Esmeralda, 1320 Buenos Aires Tel: Please refer to the end of the report to analyst and firm disclosures Banif - January 3,