Stock Market Performance: BRICs Leading Current 'Recovery'

Has an avalanche of policy actions and bank guarantees backstopped the global economy? If stock markets are a gauge of better tidings, it would seem that a bottoming phase might have started. But the jury is still out on whether the bear is simply offering a temporary reprieve.

Meanwhile, bouncing off 12-year lows, the Dow Jones Industrial Average (+7.7%) in March produced the strongest monthly gain in more than six years. This followed the Average’s worst January (-8.8%) on record and its third worst February (-11.7%).

Coming off the March 9 lows, the S&P 500 Index has advanced 20.6% in the first 14 trading days of the nascent rally, the most since 1938, based on data compiled by New York-based S&P analyst Howard Silverblatt and reported by Bloomberg. The rapidity with which the price increases have happened is cause for concern, at least in the short term.

The ebb and flow of occurrences has affected stock markets around the word as shown by the charts below, illustrating the turnaround in bourses since the lows of November 20, the subsequent January/February pullback (in some cases breaching the November lows) and then the rally that commenced on March 10. The charts of the S&P 500, the MSCI EAFF Index (representing Europe, Australasia and the Far East - the main benchmark for non-US stocks) and the MSCI Emerging Markets Index show how the drama has been unfolding.

Source: StockCharts.com

Source: StockCharts.com

Source: StockCharts.com

Zeroing in on the numbers, the performances in the table below are given in local currency terms for different measurement terms ended March 31.

Click on the image for a larger table:

From the highs of October 2007 to the end of March, the MSCI World Index and the MSCI Emerging Markets Index lost 52.9% and 58.1% of their respective values. The worst performer was Ireland (-78.3%), with Venezuela (-17.8%) claiming the dubious honor of having fallen the least.

Considering the year to date, the Shanghai Composite Index (+30.3%) is in the lead, but the competition is mounting from a few markets that put in strong performances during March, notably Russia (+20.2%, YTD +25.8%) and Venezuela (+14.5%, YTD +22.2%).

Interestingly, mature countries are still in the red for the first three months of the year, whereas the developing markets have been the ones adding value. By means of example, all four BRIC countries - leaders in the previous bull market - are in positive territory for the year to date and also comfortably ahead of the pack since the November 20 lows. This is a sign that global investors are beginning to take more risk - a necessary ingredient for stock markets in general to improve further.

Source: StockCharts.com

The gains/declines mentioned above are all in local currency terms. However, converting the movements to US dollar shows a somewhat different picture for the non-dollar countries (see table below). In general, most indices in March showed improved gains as a result of the greenback’s weakness.

Click on the image below for a larger table:

Where to from now? A number of stock market indices tested their November lows early in March. In some cases the lows were momentarily breached, but most of these situations have subsequently reversed the damage by rallying strongly. This action indicates that base building remains a likely scenario.

Also, throughout the January/February sell-off, a number of indices remained well above their November lows - for example China’s Shanghai Composite Index and Brazil’s Bovespa Index. This provides strong evidence of base formation development and it would not be surprising to see these markets among the leaders of the next bull market.

Comments

[Jeff Noel A...:]

great article, superior analyses. It will be no surprise to see a slight dip through the next several trading days for Q1 results, but as a realistic optimist, 1st half of Q2 will prove to be the positive segway to reach the 9000 level. Can we be seeing 10000 by beginning of Q3.

Positive ISM report and housing sales should do its part

Apr 01 10:11 AM

[User 371289:]

I think Brazil has a lot of potential and have recently wrote about it.
EWZ is a good play for Brazil:

- 50% of fund invested in Energy, Materials, and Utility sectors
- Brazilian banking system is well capitalized and state supported
-Healthy fiscal balances and large potential for infrastructure spending in an election year

Apr 01 03:24 PM

[Mad Hedge F...:]

Don't count on Japan to bail us out. Japan’s closely watched tankan report was released today, a quarterly report of business sentiment, showing its sharpest drop in history, cliff diving from -24 to -58. Japan is the one nation that has profited the most from globalization, and is therefore the most severely punished now that it is in retreat. Exports have dropped by half, industrial production plunged 9% in a month, and unemployment is soaring. Q4 GDP shrunk an unimaginable 3.2%, double the fall seen in the US. The last time the numbers were this bad, two atomic bombs had just been dropped on Japan and it lost WWII. Prime Minister Taro Aso’s government is embroiled in multiple scandals, taking his approval rating down to 23%, so the ruling Liberal Democratic Party’s half century long hold on power is in doubt. Elections are due in September. Perversely, a hurried unwind of a decade long accumulation of yen carry trades has pushed the yen up just short of a 20 year high of ¥87 in January, making the country’s essential exports even less competitive, and vaporizing the foreign earnings of Japanese companies. Toyota Motors (TM) has been reduced to begging for bail out money from the government, GM style. The government has passed four bailout packages in the past year totaling 13% of GPD, none of which have so far been spent. Japan has little choice but to wait for a US economic recovery, and then grab hold of its coat tails for dear life.

Apr 01 04:26 PM

[Allan Frain:]

That last sentence is a bit strong, but this brief summary of Japan's situation is accurate and, for the most part, overlooked. I would add that protracted, low interest rates have had a capital destruction effect which is a harbinger of the eventual effects of current interest rate policy in most developed nations.


On Apr 01 04:26 PM Mad Hedge Fund Trader wrote:

> Don't count on Japan to bail us out. Japan’s closely watched tankan
> report was released today, a quarterly report of business sentiment,
> showing its sharpest drop in history, cliff diving from -24 to -58.
> Japan is the one nation that has profited the most from globalization,
> and is therefore the most severely punished now that it is in retreat.
> Exports have dropped by half, industrial production plunged 9% in
> a month, and unemployment is soaring. Q4 GDP shrunk an unimaginable
> 3.2%, double the fall seen in the US. The last time the numbers were
> this bad, two atomic bombs had just been dropped on Japan and it
> lost WWII. Prime Minister Taro Aso’s government is embroiled in multiple
> scandals, taking his approval rating down to 23%, so the ruling Liberal
> Democratic Party’s half century long hold on power is in doubt. Elections
> are due in September. Perversely, a hurried unwind of a decade long
> accumulation of yen carry trades has pushed the yen up just short
> of a 20 year high of ¥87 in January, making the country’s essential
> exports even less competitive, and vaporizing the foreign earnings
> of Japanese companies. Toyota Motors (seekingalpha.com/symbo...)
> has been reduced to begging for bail out money from the government,
> GM style. The government has passed four bailout packages in the
> past year totaling 13% of GPD, none of which have so far been spent.
> Japan has little choice but to wait for a US economic recovery, and
> then grab hold of its coat tails for dear life.

Apr 02 04:04 AM

[jstratt:]

Excellent information!

I see plenty of opportunities in the US and Europe. Currency risk is a larger consideration than normal at this time.

We have farther to go in our downturn but we seem to have stopped falling. The SP500 is at about 53% of its highs. It is a time to stop and assess how much damage has been done. When I do that I conclude that a good 1 year expectation for the SP500 will be about a 25% drop.

S&P 500 1 year forecast to April 2009 is 1565*.75 = 1174. That is a 39% increase.

I point this out because I dont believe companies have lost 50% of their business in a macro sense. Others can argue that we have more shoes to drop and if that happens it would reduce the potential 1 year gain of this quickie assessment.

Apr 04 11:27 AM

[EdG:]

China's stock market is over 90% dominated by the domestic investor and is divorced from earnings and dividends, the fundamental value in stocks.

I ask: does it makes sense that the biggest banks in the world are in China? does it make sense the total market cap of China's stock markets? Did it make sense in the 90s that Japan had the biggest banks in the world? and the stock market had highest market cap?

Apr 07 08:46 AM