In an ever increasingly global economy, the panic of the sovereign debt crisis of Europe has spilled into the emerging markets. Russia has been hit the hardest due to a slowing European economy may reduce demand for Russian oil and raw materials in the eurozone. Indonesia has been the strongest performer as its economy has been growing at a steady 6% per year since the Asian crisis. The Indonesian Central Bank has continued to hold rates at 6.75% and has recently mandated exporters to return earnings back to the country.
Other notable news in emerging markets include Brazil lowering its interest rates, Egypt's inflation reaching 8.5% annually, the severe weakening of Eastern European currencies such as the Polish zloty, and chronic power outages throughout Venezuela. However, global growth concerns generated by troubles in Europe and the U.S. still dictate emerging markets equities. The capital markets are globally intertwined and emerging exporters have unable (or unwilling to) decouple from Western economies. As a result, I expect the near term pullback in these stocks to continue for the rest of the month, but buying opportunities will arise by the end of October.
Performance by Country for Week of 9/5-9/9 2011:
Indonesia: +2.8% - Leader
Russia: -13.8% - Laggard
South Korea: -6.2%
S&P 500: -2.2%
Notable Top Performer: Arcos Dorados (ARCO)- While the rest of the Latin American markets are tanking, ARCO has shown relative strength trading up 3.13% for the week. ARCO owns over 7000 McDonalds (MCD) locations across Latin America and its business combines the global brand recognition of the golden arches with the growth of the emerging market consumer (25% earnings growth expected for next five years). Another plus for the company is that food is the last thing consumers tend to give up during a weakening economy. For more on ARCO, read my column I publushed last week on the stock.
Notable Underperformer: Ambev (ABV)- This stock has been one of my favorites for the year, but this week has been disastrous. After reaching its 52-week high on September 2nd, the stock has fallen 7.76% since. There has been no bad company news responsible for the stocks plunge, but it had reached the top of technical channel and had been overbought for weeks. Nevertheless with an ROIC of 26.5%, a 32% profit margin, and dominant control of the Brazilian beer and soft drink markets, I am still long run bullish on the stock. Place limit orders at $29.00 to take advantage of the current pullback.