Highlighted in this post is Gafisa SA (GFA).

The construction business in Brazil had a great first half of 2008; however, the performance of the sector was highly affected by the credit crisis in the end of the year. The driving force behind the sector in recent years was the emergence of a mortgage market in Brazil -- a great development since domestic rates were lower than ever in 2007, even though still high by international standards.

The higher rates in 2008 as a result of inflation fears were a source of concern during the first 3 quarters of 2008. Nevertheless, the real problem came with the deepening of the crisis and the lack of long-term credit lines to finance the construction business.

The availability of lines is still a problem, though domestic rates are expected to fall fast -- reaching around 10% per year, the lowest level in Brazil for at least 25 years. Since the Brazilian banking system remains solid, healthy and underleveraged, we have no doubt that lower rates will prompt more long-term credit somewhere in the following months, though it is not yet clear how long this process will take.

The Brazilian Government will try to accelerate the process. This week is expected to be announced a new package of measures in order to help the Brazilian construction sector in the short-term.

According to the papers, among the measures under consideration are tax cuts and subsidies for acquisition of new homes. We believe it is still too early to have a more positive view on the sector, but the new measures could be a great help. For the time being, we are keeping a Hold recommendation on Gafisa (GFA), but we are looking forward to analyzing the new measures.