Emerging Markets Stage a Dramatic Comeback

Measured in dollars, Brazil's stock market has rebounded 164% since its lows of last November. I've highlighted this chart several times in the past, remarking that the outlook for emerging market debt and equity was very promising. So far that advice has been spot on. One key to the emerging market economies' recovery is easy money. Easy money helps push commodity prices higher, and it helps weaken the dollar. Both of these result in a big rise in cash flows for these economies.

Another factor is that they suffered terribly in the crash last year, so their rebound should be stronger. Yet another, which is relatively unremarked, is that for the most part these economies enjoyed better monetary policy than the U.S. did in the years leading up to the crash. Most emerging market currencies appreciated significantly relative to the dollar because of better monetary policy. Without the easy money-goosed speculation in real estate markets, their economies weren't so damaged in the crash. They suffered mostly from a big drop in commodity prices, but that problem has faded fairly rapidly with the return of easy money.

Finally, I would say that one reason these economies had better monetary policy was because they have managed (with some exceptions, notably Argentina) to mature at the fiscal policy level. Policies have been generally more stable and more respectful of the power of free markets than they have been in the past. When you introduce stability and maturity to an economy that has struggled for years only to keep falling behind the progress in the industrialized world, you have the potential for some spectacular growth catch-up, and that is what we are seeing now.

Full disclosure: I am long EMD, CHN, and SLAFX at the time of this writing.

Comments

[Living4Divi...:]

Good article. Emerging markets used to be the countries in high debt - at risk of default. In this modern area - it s the emerging markets that are in good fiscal shape - they have built up surpluses. Of course they will remain volatile. But, then again, the US is also volatile.

It would be interesting to see the Bovespa chart in the local currency Reals.

Sep 17 07:42 AM

[Mad Hedge F...:]

yyt It’s all about the dollar, which I have hated all year (click here for my call ). The assured onslaught of federal debt issuance headed our way will be the overriding investment consideration for traders and portfolio managers for the next decade. That will knock the stuffing out of the greenback against every currency except the Zimbabwean dollar, and even that will rally when you get a regime change. There was once an argument that foreigners piled into these currencies to capture a huge yield pickup, but even that advantage is now gone. The soggy buck also explains a lot of what is going on in our stock market, with companies earning most of their from increasingly wealthy foreigners, like those in technology, energy, and commodities. As I write this, I am looking at new one year highs for my favorite picks of the former British crown colony currencies of the Canadian (up 14% YTD), Australian (up 26% YTD), and New Zealand (up 23% YTD) dollars (for my C$report click here ). There bounteous resources, Anglo-Saxon contract law, an almost common language, and vibrant ports make them the safe bet of choice. It’s just a matter of time before the loony hits parity, to be followed by the Aussie dollar, and then the kiwi.

Sep 17 11:46 PM

[Brazilian R...:]

My Brazilian stocks did quite well thanks to Peter Schiff recommendations on getting out of US Stocks, I'm a very skeptical investor mostly because I'm new to this world of trading and I don't know enough to be comfortable moving a lot of money around. I played safe at the beginning of this year and sent money to Brazil when the US Dollar exchange rate was almost 2.5 Reais. I did for two reasons: One, based on the "rumors" that the US Dollar was going to collapse. Two, even if it didn't by having my money in CDB (Brazilian CDs) and also in Savings I would make money even if dollar stayed the same. CDB returns a little over 18% a year and Savings about 6% a year in Brazil. It felt a like a gamble at the time but I'm very happy with my lucky investment now.

Sep 18 12:57 PM

[chap08:]

"Most emerging market currencies appreciated significantly relative to the dollar because of better monetary policy"

The main reason is simply because of trade. They have trade surpluses, we have a chronic trade deficit. Without intervention by central banks, that will naturally cause their currencies to gain against the dollar.

Sep 19 10:22 AM

[MexCom:]

Mexico = oil. Has anybody heard? There was a recent discovery in the Gulf of Mexico - they say reserves could be bigger than Saudi. Is this anywhere near our county to the South?

Its amazing the paucity of news and coverage for Mexican companies. I'm pipsqueek blogger with limited time.

I'm big on GMK and ICA. Lots of interesting developments and no coverage, no news and not even a rumor mill.

This alone can make for a grand opportunity for those who will get in early and then start sharing the word about it.

Sep 20 11:33 AM

[jambo:]

The ease of obtaining money there is also due to the influx it receives from fleeing investors here stateside. Even the most shallow analysis points to a huge upside versus US equities. Labor base, resources, tight money ship all sound good to me. Remember when it was that way here? Real growth of 3 to 6 % annually like a freakin clock. As we lean more to Obamunism that will continue to tank big time.

Sep 22 09:07 PM

[rakj124674:]

Same is true for India too. Similarly fundamentally sound story.


On Sep 17 07:42 AM Living4Dividends wrote:

> Good article. Emerging markets used to be the countries in high debt
> - at risk of default. In this modern area - it s the emerging markets
> that are in good fiscal shape - they have built up surpluses. Of
> course they will remain volatile. But, then again, the US is also
> volatile.
>
> It would be interesting to see the Bovespa chart in the local currency
> Reals.

Oct 04 02:52 AM