New York Market: Investors stay confident despite Brazil

THE devaluation of the Brazilian real may yet lead to a reduction in U S exports and losses for banks holding Latin American debt. For now, however, investors are discounting any serious threat to corporate profits and the US stock market.

When Brazil let its currency float freely on Friday, ending a policy of supporting the real, the Dow Jones Industrial Average gained 2.4 per cent, snapping four days of declines.

After taking billions of dollars out of Brazil in recent months, some investors called the week's events anticlimactic. "We all knew it would take place," said Tony Hitschler, president of Brandywine Asset Management.

It's true that 18 per cent of US exports are to Latin America, where Brazil is the biggest economy. It's true that companies like Xerox and Coca-Cola rely on Latin America for a large chunk of their sales. And US financial services companies have an estimated $65bn (pounds 39.4bn) in investments at risk in Latin America.

Still, for now, Brazil's decision to let the real fall raises optimism that its battered economy may be closer to recovery than first thought, without scaring investors out of putting their money in to emerging markets.

The fallout from Brazil is "somewhat uncertain but it appears it will be contained to Latin America", said Joe Stocke, manager at Meridian Investment.

Other investors were not so sure market volatility in the US had subsided. "The key is whether this [Brazilian] devaluation is followed by a credible fiscal package," said James Weiss, at State Street Research & Management. "If it is, Brazil dodged the bullet." One reason investors lost confidence in Brazil was its failure to reduce its budget deficit.

The Dow average lost 3.1 per cent last week, while the S&P 500 gave up 2.5 per cent and the Nasdaq gained 0.2 per cent.

The Nasdaq was largely lifted by gains in internet-related stocks such as Yahoo!, Amazon.com, eBay and Excite. Yahoo! now sells at 422 times this year's estimated earnings. "If these stocks fall 60 per cent they are still overvalued," said David Bayer, at Knappenberger Bayer Growth Advisers.

The latest internet initial public offering, MarketWatch.Com, which operates a financial news website, gained more than fivefold to close at $97.5 - proof that the fascination with internet issues has not abated.