Update on Brazil, BRICs

Thursday, December 29th, 2011

In response to Brazil is World’s 6th Largest Economy, Overtaking UK Earlier this Year. Can Brazil Overtake France by 2016? What about BRICs in General? I received a nice email from Felipe Fiel, an economist from Brazil working in the hedge fund industry for Fram Capital.

Felipe writes …

Hi Mish, hope is all well with you. First of all I would like to congratulate you for your blog and outstanding contribution do financial observers. I’m an economist who lives in Brazil, working for the hedge fund industry.

I agree entirely with you about Brazil’s skepticism.

I would like to highlight that the way you show inflation and GDP might cause a distorted impression to your readers.

You show GDP growth quarter-over-quarter seasonally adjusted, without annualizing it, which is the norm for US viewers. It was running at almost 8% annualized growth before 2008 crises and even recently it grew at 3.2% in the 4 quarters before stagnating in 3Q.

For next year, even the most pessimistic projections see growth at 4.3% on average, which is more or less what is seen at GDP potential. However, I personally think we cannot growth at that rate without generating too much inflation.

Best,
Felipe Fiel

BRIC Decade Ends as Growth Peaked

According to Goldman Sachs, BRIC Decade Ends as Growth Peaked

Dec 28, 2011

In the past decade, mutual funds poured almost $70 billion into Brazil, Russia, India and China, stocks more than quadrupled gains in the Standard & Poor’s 500 Index and the economies grew four times faster than America’s.

Now Goldman Sachs Group Inc. (GS), which coined the term BRIC, says the best is over for the largest emerging markets.

BRIC funds recorded $15 billion of outflows this year as the MSCI BRIC Index sank 24 percent, EPFR Global data show. The gauge, which beat the S&P 500 by 390 percentage points from November 2001 through September 2010, has trailed the measure for five straight quarters, the longest stretch since Goldman Sachs forecast the countries would join the U.S. and Japan as the top economies by 2050.

BRIC indexes may fall another 20 percent next year, buffeted by the liquidity squeeze stemming from Europe’s sovereign debt crisis, Arjuna Mahendran, the Singapore-based head of Asia investment strategy at HSBC Private Bank, which oversees about $499 billion, said in an interview. Nations such as Indonesia, Nigeria and Turkey may overshadow the BRICS in the next five years as they expand from lower levels of growth, he said.

“The slowdown we’re seeing in the BRICs will continue for most of the first half,” Mahendran said. “Compared to the U.S., corporate profits haven’t been that good as companies face higher wages, higher interest rates and currency volatility, and at best, we’ll only start to see the effects of monetary policy loosening in the second half of 2012.”

2011 Losses

The BSE India Sensitive Index led declines among BRIC equity gauges this year, falling 23 percent. China’s Shanghai Composite Index also dropped 23 percent, while Russia’s Micex retreated 18 percent and Brazil’s Bovespa sank 16 percent. The 21-country MSCI Emerging Markets Index (MXEF) lost 20 percent, while the S&P 500 gained 0.6 percent.

The time to warn about BRICs and emerging markets was a year ago, which I did, specifically in regards to China (but also with many references to trade surplus nations and commodity producers throughout the year).

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Tags: 3q, Bric Funds, BRICs, China Stocks, Crises, Decade Ends, Emerging Markets, Fiel, GDP, GDP Growth, Global Data, Goldman Sachs, Goldman Sachs Group, Goldman Sachs Group Inc, Hedge Fund, Percentage Points, S 500, Sachs Group Inc, Skepticism, Straight Quarters
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Do Bullish Investors Have an Ace in the Hole?

Saturday, October 22nd, 2011

Do Bullish Investors Have an Ace in the Hole?

October 24, 2011

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Right now, there are planes full of travelers heading to Vegas with dreams of striking it rich. These starry-eyed gamblers would greatly improve their odds by learning how to count cards. Yet, as we learned in the movie 21, where six MIT students team with Micky Rosa to become expert card counters and “bring down the house,” this highly illegal technique carries dire consequences.

You may not be able to count cards at the blackjack table, but counting historical trends of the stock market and discovering inflection points are not only legal strategies, they are essential to successful investing.

One “card” worth counting is the Purchasing Managers’ Index (PMI), which measures the manufacturing strength of any given country. A rising PMI indicates a growing economy and is considered a leading indicator. There are three different types of indicators: coincident, lagging and leading. PMI is considered a leading indicator, meaning its movement historically occurs three to six months before the market reacts.

In China, the PMI just crossed above the three-month moving average. Historically, there’s a 67 percent probability that Hong Kong and China stocks, as measured by the Hang Seng Composite Index, will trade higher over the following three months when this happens. So far in October, the index is up 3.2 percent, and if this historical trend is sustained, we should see continued positive performance.

This could be an “ace in the hole” for investors after a dismal September which saw emerging markets decline 17 percent, and U.S. equities fall 7 percent, according to ISI. We also saw the largest amount of money pulled from emerging markets since the fourth quarter of 2008, according to UBS. For the first time in several months, the monthly change in foreign exchange reserves declined double digits.

Three sectors—financials, materials and oil & gas—were primarily responsible for the dismal returns, say Bijal Shah and Stan Shipley from ISI, with emerging markets feeling the brunt of this downturn. That’s because the makeup of many emerging market indices primarily consist of these three sectors. In Russia, 88 percent of companies are in these three areas of the market, with 52 percent in the oil & gas industry, 21 percent in materials and 15 percent in the financials industry. Poland, Brazil and Hong Kong all have 70 percent or more of their companies in these three sectors. Only two markets—Mexico and the Czech Republic—have 20 percent or less in financials, materials and oil & gas.

It’s a much different story in the U.S. where these three sectors comprise less than a third of the market. As investors shunned these stocks, emerging market countries were punished more severely. Although the ongoing European crisis was the primary driver for exiting equities, ISI notes that emerging market banks have “negligible exposure to Euro area sovereigns.” Nonetheless, the banks in these developing countries declined considerably based on the counterparty risk that follows if European countries default on their bonds.

The ongoing crisis in Europe has not only affected emerging markets, it has also negatively influenced the price of many commodities. UBS states that an “escalating bank funding stress in Europe is forcing a profound deleveraging process.” As U.S. money markets have been forced to pull their funds out of Europe, the short-term financing markets, which include commercial paper and trade finance, have been stressed and have weakened industrial and commercial credits. Companies involved in the trading and movement of commodities have had to run their businesses for cash, resulting in the disruption of commodity shipments.

This is clearly a negative for commodity prices in the short-term, but we believe the effects have already been priced into the market. Also, UBS indicates that this has pushed commodity inventories to “unsustainably low levels” and once credit conditions improve, demand should increase.

Imports of major metals to China are already running low, says Credit Suisse. While the year-over-year change in iron ore imports is at the same level as last year, copper imports are at an 11-year low, based on its year-over-year percent change.

So, if you’re counting the market’s cards, you can see that nearly all of the bear market’s aces have been played. Now that China’s PMI has turned upward, along with the potential for China’s monetary policy easing, it’s possible we’ll see a run in commodities through Chinese New Year.

Tags: Ace In The Hole, Blackjack Table, Bonds, Brazil, Card Counters, Chief Investment Officer, China Stocks, Commodities, Double Digits, Foreign Exchange Reserves, Frank Holmes, Hang Seng Composite Index, How To Count Cards, Illegal Technique, Inflection Points, Leading Indicator, Legal Strategies, Micky Rosa, Moving Average, Pmi, Purchasing Managers Index, Students Team, U S Global Investors
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