Emerging Markets are Bouncing

If you think it was bad for our market last year, you haven't seen what happened in emerging market economies. As this chart shows (click to enlarge), Brazilian stocks lost almost 71% of their value (in dollar terms) from last May through November 21st (which now is looking like THE bottom for most risky assets). Since then they are up a whopping 45%.

These markets were crushed by panic and forced selling of all risky assets, compounded by the fact that collapsing commodity prices were rapidly empoverishing these economies, since they rely so heavily on commodity exports. And to top it off, their currencies collapsed as the dollar soared against everything. It was a Perfect Storm.

Now we are seeing a bottoming in commodity prices, a somewhat weaker dollar, and a gradual return of the appetite for risk. In the jargon of today, investors seem to be putting back on the "carry trades" that they were desperate to take off last year.

After bouncing along a bottom from mid-November through late December, the Journal of Commerce Metals Index has bounced 10%. Crude oil futures are up 35% from their pre-Christmas low. Soybeans are up 25% from their lows a month ago. The future of the emerging market economies is suddenly looking far less dire. If the global economy avoids a catastrophic collapse, as seems increasingly likely, there is lots more room for improvement here.

Full disclosure: I am long SLAFX as of this writing.

Comments

[jepittman]

IMO the Brazilian market is a good place for a small slice of a diversified portfolio. Virtual energy independence, a diversified commodity producer with a young, growing middle class is a nice longer term set up. Throw in a central bank that 'gets it' and its even better. Economicly Brazil will dominate South America.

One other thing, some say their recent oil and gas discoveries rival those in the North Sea near Norway and Britain. They are deep and expensive fields to exploit but they will be developed. Personally I like Brazil best of all the emerging markets but as the author says it is volitile. I am being careful, buying weakness, buying small, and staying very very patient.

Disclosure: long SMALL positions in ewz & pbr

2009 Jan 06 04:29 PM