- Markets & Risk Newsletter
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PortfolioScience would like to wish our clients, partners, and associates Happy Holidays and all the best for the coming New Year. Happy Holidays!
- BOVESPA, BRIC, and Volatility In its April 2007 edition of the World Economic Outlook, the International Monetary Fund pronounced, "The old saying, 'If the U.S. sneezes, the rest of the world catches a cold,' remains relevant.'" Less than three years later, the IMF's message now seems like the remnant of a bygone era. The ongoing global recession has revealed many new truths, not the least of which is that Brazil, Russia, India, and China-the four economies dubbed "BRIC" by Goldman Sachs-are becoming increasingly immune to economic illnesses that may from time to time affect the world's biggest economies including the United States, Japan, and Germany. It's a trend called decoupling, and it means greater opportunities for investors. But it may also mean increased risk.
Within three to four years, Brazil, Russia, India, and China will likely see equity gains of 30 percent to 40 percent as higher economic growth and lower government debt spur corporate earnings. The biggest growth areas in emerging markets are commodities and consumer goods, with Brazil offering among the most attractive stocks worldwide compared to assets. As early as 2025, Brazil is on target to rise from number ten to number five in GDP, ahead of France and the United Kingdom and right behind Germany. Last year Standard & Poor's awarded Brazil an investment-grade credit rating, spurring investment from big global pension and insurance funds and other institutional investors. With Rio de Janeiro slated to host the Olympics in 2016, Brazil's international media profile will be heightened. The weakening of the dollar and gains in commodities have helped several emerging markets, including Brazil. To date in 2009, Brazil's Bovespa Index is up over 76%. The gains in Bovespa have been evenly distributed among a variety of companies. Vale SA (the world's biggest iron-ore miner), Usinas Siderurgicas de Minas Gerais SA (the biggest supplier of steel for the auto industry), and Randon SA Implementos e Participacoes (which makes auto parts), are poised for long-term growth.
Thanks to the strong appreciation of Brazil's currency, the real, U.S. investors in the dollar-denominated ETF (EWZ) are up an impressive 110%. And while much of the global economy struggles with recession, Brazil's economy is expected to grow by 5% in 2010. But a comparison of the one-year historical Bovespa Index with the NASDAQ, S&P 500, and the Dow reveals that while there is tandem movement, the Bovespa exhibits both an increased decoupling and more volatility than its U.S. counterparts. For example, in March of 2009 when the U.S. markets took a nosedive and losses were in the range of ten to twenty percent, the Bovespa hovered at 40,000 with virtually no loss from the previous mark at the beginning of the New Year. But the Bovespa's ascent to a peak in June of 55,000 was more rapid than that of the U.S. markets, followed by a slide to under 50,000 by mid-July-in both cases a bigger percentage change. The Bovespa took off again, with a wild ride above 65,000 in October followed by a dip to 60,000 by November 1, and then another surge to 68,000 in early December. All along the way, the Bovespa displayed higher volatility than its U.S. counterparts.
Investors who seek a comfortable tag-along to the established industrial markets should avoid the Bovespa. But those who are ready to handle increased volatility and the potential for significant profits will find what they are looking for. For information on powerful risk-management tools that allow you to track and measure the risk of emerging market indexes, equities, futures and options, contact PortfolioScience today. |
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