A Global Game of Economic Chicken?

Here's a thought: Are too many countries playing a kind of economic chicken? Their refusal to control stimulative policies, despite increasing inflation and runaway oil prices, has them in a highly risky position.

Many countries are already experiencing double-digit inflation -- Russia, Turkey, South Africa, India, Indonesia, and the Philippines -- despite recent interest rate increases.

 These guys are falling behind the curve," says Edwin Gutierrez, an emerging-market bond portfolio manager at Aberdeen Asset Management in London, in the hopes that the surge in food and energy prices will prove short-lived. "It's a very dangerous game," says Mr. Gutierrez.

One of the few exceptions? Brazil:

...There, the central bank moved quickly to raise interest rates despite comparatively mild price pressures. The country suffered enormous inflation in the late 1980s and early 1990s before getting the problem under control. "Brazil knows better than anyone what happens with hyperinflation," says Terrence Gray, who manages $3 billion in emerging-market stocks at DWS Scudder, an arm of Deutsche Bank.

Comments

[buyitcheap]

If the inference is buy Brazil, I'll take Switzerland.

[ALMIR]

The Brazilians are the only country in the world that created a real alternative for petrol. It's sharply-raising cheap and non-subsidised ethanol market has soften the pressure from soaring oil prices. The country also depends more on renewable resources than fossils to generate electricity, so it's a significant protection to the turbulence in international oil markets. Such balanced and wise energetic police was developed in many decades at a very high cost, and now it's helping a lot to protect the country from inflationary risks.

[Muddling Investor]

To Almir:

1. Brazil is oil independent, because it invested heavily in oil production. Not because of ethanol.
2. Renewable resources (i.e. hydro power generation) are limited everywhere. Europe and US don't have any places to build new hydro plants anymore. With increased energy use, Brazil will have to build fossil fuel power plants. Or nukes. Most probably, both.
3. Inflation is mostly the matter of money policy and psychology. Doesn't have much to do with oil prices and nothing at all with energy policy.

[Valmiki]

It is interesting that you highlight the inflation threats in China, India, Russia etc,. I wonder if any American thinks that inflation is running at the 2.5% rate that the Fed postulates; On the ground inflation in the US has to be over 10%; A pseudo-nationalization of the Wall Street Investment Banks; bail out home owners who got their McMansions for free, thanks to de-regulation; Now all is left is to advise the rest of the world how they should run their economy. Just as Wolfowitz took over the World Bank, our great economic intellect, Greenspan should take over the ECB to ensure that other countries do not screw up.

[Contrarian Profits]

There are more than 30 Brazilian companies with full American Depository Receipt (ADR) listings on the New York Stock Exchange, plus 40 to 50 more that are traded in the over-the-counter market. Here are a few attractive examples to consider:

* Banco Itau Holding Financeira SA, referred to usually as Banco Itau (ADR: ITU), has a Price/Earnings ratio of 12.20 and dividend yield of 2.4%. Brazilian banks earn very high returns, primarily from domestic market lending in reals. Including Banco Itau, there are three large ones listed on the Big Board in New York; the other two are Banco Bradesco SA (ADR: BBD) and Uniao Bancos Brasile SA (Unibanco) (ADR: UBB). However, Itau is the cheapest of the three, though only slightly.

* Companhia Vale do Rio Doce, now referred to only as Vale (ADR: RIO), is one of the true global blue chips, with a market capitalization of almost $200 billion. An iron-ore company with ancillary operations in gold, nickel, copper and other metals, its shares trade at a reasonably valued about 13 times earnings, though its dividend yield is only 1.2%.

* Petrobras (ADR: PBR) is one of the few emerging market oil companies with access to modern technology - and the willingness to work with the oil majors. Its shares are up 168% in the past year, but the stock’s P/E still is only 19.37. It has a 1.3% yield. The possible upside: It finds another gigantic offshore oilfield. The possible downside: Oil drops back to $50 a barrel. If the world’s monetary authorities get serious about imposing higher interest rates to fight inflation, PBR and RIO would probably suffer as commodities prices fall back to earth.

* Companhia de Saneamento Basico (Sabesp) (ADR: SBS) is the water and sewage system provider for Sao Paulo. Now that’s a growth business, and not dependent on commodity prices. With a P/E of only 8.33 and a yield of 2.7%, this is one stock I have to say I love.

* TNE (ADR: TNE) There are a bunch of Brazilian cell phone companies, but TNE appears to be the cheapest. It’s concentrated in the populous southeast and northeast regions of Brazil, with a P/E ratio of only 6.15 and yield of 4.25%.

* Telecomunicacoes de Sao Paulo SA, or Telesp (ADR: TSP) provides the fixed line telephone system for Sao Paulo. Before you sneer, consider this: the company has a dividend yield of 9.8% and a P/E ratio of 10.07 (which means the dividend is only just covered). And it’s majority owned by Spain’s Telefonica.

* Voturantim Cellulose (ADR: VCP) is a pulp and paper company, with a P/E ratio of 13.95 and a dividend yield of 2.8%. Trees grow fast in the tropics and VCP definitely benefits from that!

Source:

www.contrarianprofits....