Many traders have been surprised by the stock market's strength
in recent weeks, expecting that the poor employment picture and
lukewarm U.S. recovery would send equities lower. However, their
focus on known problems in the United States and Europe have caused
them to miss many overlooked strengths in other countries such as
Malaysia, Peru, Brazil, and Singapore.
Let's be honest. For most investors, these countries are the
answers to the blue geography questions in Trivial Pursuit. For
decades they where economic backwaters or footnotes in the great
game of finance and investing. But the great thing about capitalism
is that it knows no such boundaries and there are no fixed kings:
Anyone can be a Henry Ford or a Bill Gates if he or she produces
something of value and works hard. The same goes for countries, and
it is happening right now.
Given how light the calendar is for economic data in the U.S. this
week, we thought that it would be interesting to consider what's
been happening in some of these smaller countries that get less
Credit Suisse is forecasting that the Brazilian central
government's surplus will expand more than 500 percent in August
from July, thanks to a 15.3 percent increase in tax collections.
While no one likes paying taxes, in this case the data is bullish
because it results from real income growth.
Last week Brazilian oil giant Petrobras successfully issued $67.1
billion of new shares, the largest follow-on stock sale ever. One
positive is that bankers had to offer a smaller-than-expected
discount to move the deal. Another positive is that the transaction
pushed capital raising in local Latin American markets to a record
$49.3 billion, according to Dealogic. That's pretty impressive
considering that we still have three months to go in the year and
that U.S. underwriting has been lackluster.
It's also evidence that emerging countries are now developing their
own local-currency capital markets. In the case of countries such
as Peru or Colombia, this results from key legal reforms quietly
enacted over the last 15 years but largely ignored by U.S.
investors. China is also trying to develop its own corporate-bond
market, and for countries such as Malaysia the new Islamic finance
model is growing rapidly.
This trend has manifested itself in the little-watched Markit iBoxx
Global Emerging Markets Local Currency Bond Index. The benchmark is
up 11.91 percent this year, beating the 11.37 percent gain for U.S.
corporate and the 8.59 percent return for Markit's high-yield
The trend of local-economy strength has also caused a situation not
seen since the 1970s, where incomes are growing faster in
emerging-markets and stagnant in the United States. There are
various ways to play this trend, the easiest probably in liquid
names such as Freeport-McMoRan Copper & Gold (
), a proxy for global growth, or iShares MSCI Emerging Markets
The stocks with the most direct exposure have already rallied
significantly. And, most of them are either illiquid, such as
), or don't have options at all, such as Peru's Credicorp (
) or Colombian oil producer Ecopetrol (
). (I have sold my position in CIB since I wrote about it on Aug.
Other names worth examining despite offering few options
opportunities include the iShares MSCI Singapore Index Fund (
), iShares MSCI Malaysia Index Fund (
) and iShares MSCI All Peru Capped Index Fund (
The bigger takeaway is that plenty of good reasons underpin the
market's recent strength. We in the United States are struggling to
recover, but other countries are in the midst of a real growth
cycle. It's their time to lead markets, and traders need to follow
where the action is.
(Chart courtesy of tradeMONSTER)