One of my favorite, and one of the most simple metrics for
macro-level investing, is growth in loan demand and bank deposits.
Right now, rising loan demand in parts of Latin America can result
in a big payoff for investors.
[caption id="attachment_71650" align="alignright" width="300"
caption="Latin Americans are taking out loans for cars and other
consumer goods"]
[/caption]
Guillermo Babatz, president of Mexico's National Banking and
Securities Commission, recently said
loan growth in the country should increase by close
to 15%
this year, more than four times the expected increase of 3.7%.
Consumer loans are expected to increase 24% as strong exports to
the U.S. fuel a rise in real wages and domestic demand. While I
still hold that the market is slightly overvalued in the short term
and that investors could wait for a pullback to take a position,
the strength in financial markets is definitely a long-term
positive for Mexico (
EWW
,
quote
).
Contrast this growth in credit with that in the United States,
where deposits are rising with
no corresponding loan demand
and forcing banks to pour money into lower-yielding
instruments like Treasuries.
Strong credit growth and an accessible loan environment are
among the foundations of a strong economy and usually precede an
increase in asset values. Of course, the markets can turn a
positive economic fundamental into a bubble and burst it as quickly
as you can say, "Where did my money go?" Everyone from the
president of the United States to the local loan officer was
praising rapid mortgage growth before the housing bubble popped in
2007. The S&P 500 rose more than 67% between February 2003 and
2007 on loan growth in housing, before sinking almost 50% over the
next two years.
Fortunately, there is a difference between good and bad growth
in loan demand, and it is not as difficult as you might think to
distinguish between them. A case in point is Brazil (
EWZ
,
quote
), and a story we have been following at Emerging Money. While the
country has experienced loan growth of 18% or more over the past
few years,
default rates on loans
have increased for five consecutive quarters. Nonperforming loans
as a percentage of total loans, as reported by the World Bank, now
stand at 4.2%, well above the 3.7% reported in the second quarter
of last year. As a comparison, nonperforming loans as a percentage
of total loans is about 2% in Mexico and 2.5% in Chile (
ECH
,
quote
).
As nonperforming-loan rates start to inch up, banks start
increasing the amounts they set aside for loan losses. Watch this
number in a country's biggest banks. Their loan portfolios are
going to represent the market fairly well. When they start putting
away money for hard times, you should do the same.
Lending and borrowing are among the cornerstones of a strong
economy, and loan demand is one of the best metrics to use in your
long-term investing strategy. Right now, developed markets like the
United States have deposits but no loan demand, while countries in
Latin America are experiencing a secular shift to deeper financial
markets. Following some simple metrics can help you be in the right
markets at the right time.
