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Bovespa (BVSP) and the Dow (DJI), Decoupled

Since its November 2008 trough, the Bovespa is up 127.6%.  The Bovespa (BVSP) is an index of 50 Brazilian stocks on the Sao Paolo exchange, with a base year of 1968.  During the recent bear market, the BVSP hit bottom before the Dow, on November 24, 2008 at 31,255.  Today it reached 71,136, a rise of some 127.6%.  The Dow hit a low of 6,626 on March 6, 2009.  It closed today at 10,927, an increase of 64.9% from its trough.  Below, Bovespa over the last two years:

Brazil Tightens Monetary Policy

Bank reserve requirements are increased.  Brazil's central bank increased reserve requirements on term deposits from 13% to 15% on Wednesday.  This will withhold currency from the money supply, as the country is now in recovery mode and expects GDP growth of 5.5% for 2010.  In the US, the required reserve is 10% on transaction deposits and zero on time deposits.  In China, the reserves required for large banks was recently increased to 16.5%.  Details at the WSJ.

Oil: No Longer Priced in Dollars?

Per the The Independent:

"...Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currenciesincluding the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar....Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars...The current deadline for the currency transition is 2018."

What does this mean?  Less demand for dollars and therefore a lower valuation.  Sellers of oil don't want dollars when the currency is devaluing.  According to The Independent, "It makes economic sense for world trade to be conducted in a variety of currencies. Relying on one only has the advantage of clarity, but it also creates instability if the economy that underpins it faces uncertain prospects."

BRIC Economies on the Rise

The BRIC Countries (Brazil, Russia, India, China)  suffered less during the current recession and returned to growth more quickly.  This is why I believe it is important to be diversified, not just across asset classes, but also geographically.  From Deutsche Welle comes this news: 

"When future generations look back at the current financial crisis, they'll almost certainly take notice of an important shift in the balance of world power. Because with wealthy Western nations - and particularly the United States - still reeling from the hits they took, the road has suddenly opened for emerging nations to make a grab for a greater share of economic power, and with it, global influence...Combined, the BRIC countries currently have a 15-percent share of the world economy and a 42-percent share of global currency reserves...BRIC is using its new influence to put pressure on the IMF to reshape its voting structure to better reflect the shift in economic power...Brazil, for example, is the world's 10th largest economy, but has just 1.38 percent of the IMF board's votes, compared to 2.09 percent for Belgium, an economy one-third the size."

BRIC Recoveries

Economic growth has returned in China and Brazil.  Brazil's two-quarter recession is now considered over as second quarter GDP rose 1.9% over the first quarter figure of -1.2%.  And in China, new August data shows output from factories rose 12.3% over the prior year and GDP growth is expected to be 8.3% for 2009.  From Reuters:

"...Brazil's economy has since shown signs of a robust recovery, even as other major economies are struggling to emerge from recession. Analysts say the economy was shielded from a deep recession by the country's solid banking system and has been boosted by a series of government tax breaks and sharp cuts in interest rates...Finance Minister Guido Mantega said last month that the economy was already growing at a pace of 4 percent at the beginning of the third quarter."

Brazil Has Decoupled

Many analysts are of the opinion that emerging financial markets around the world will not, or can not, decouple from US markets and the Dow.  However, I Brazil already has.  The evidence is clear: the Dow began 2008 at 13,261and is now at 11,346, a decrease of 14.4%.  The Bovespa, Brazil's stock index, began the year at 63,885 and is currently 64,321, an increase of 0.7% and a difference of 15.1% from the Dow. See the chart below, after the jump, comparing the Bovespa to the Dow and S&P.  And listed below are some Brazilian ADR's and their year to date performance.  The only sectors that are down seem to be airlines and financial, but their declines are far less than those of their US counterparts.

SID, Companhia Siderurgica Nacional, SA, +45.9%

TCN, Tele Norte Cel, +30.2%

TNE, Tele Norte Leste Participacoes, SA, +27.9%

SDA, Sadia, SA, +24.1%

PBR, Petroleo Brasileiro, +17.8%

Foreign Markets Decoupling From US?

The Dow (DJIA) dropped 238.42 points, or 1.86 percent today.  The Standard & Poor’s 500 index dropped 25.99 points, or 1.84 percent.  But foreign equities in general fared much better today, even those that lost some ground.  Look at the following indices:

EWM, iShares Malaysia, +1.74%

INP, IPath India Index, +0.91%

EWL, iShares Switzerland, +1.1%

EWG, iShares Germany, -0.69%

EWZ, iShares Brazil, -0.01%

EWA, i Shares Australia, -0.89%

EEM, Emerging Markets Index, -0.78%

More BRIC Politics - Brazil

If you are going to invest in emerging markets, it is certainly helpful to understand the politics, as this   is usually one of the larger risks.  The next elections for the president and senate of Brazil will be in 2010, and it seems there could be a change in the ruling party, given the growing levels of dissatisfaction with it, although it is still quite early.  President Lula da Silva will not be able to run again, as there is a two-term limit.  However, his party, the Worker's Party, has become widely unpopular as it has absolved Renan Calheiros, a party member and head of the senate, of corruption charges in a closed vote.  It was widely thought that he was guilty.  Although da Silva's party is known as the Worker's Party it has been very pro- business, which is good for stocks. But the party is now generally perceived as plagued with corruption, and passing laws that favor agribusiness, banks, and repaying the country's foreign debt.  This is true even though the party platform originally revolved around helping the poor.  There are four other major parties in Brazil: the Social Democracy Party, Socialism and Freedom Party, Democratic Labor Party and Social Liberal Party.  Most of these are perceived as less "pro-business."

The Politics of BRIC

The BRIC countries - Brazil, Russia, India, China - are home to some of the world's top high growth stocks.  But what is going on politically in these places now? Could current news add an extra element of risk to the returns?  Consider the following:

Brazil - The president of Brazil's senate, Renan Calheiros, an ally of President Lula da Silva, narrowly survived a vote of confidence and will not be expelled for corruption (Economist).  This vote has been incredibly unpopular with the public, which is becoming increasingly intolerant of corruption and payoffs in politics (Newsweek).  It has also weakened support for da Silva, who has generally been good for the economy.  Recently, some 40 career politicians were indicted for corruption and payoffs.

Russia - According to an acquittance in Moscow, the consensus of financial analysts and strategists there is that Russian stocks will "get a strong boost when Putin selects the man who will be the next president... when he gives his blessing implicitly or explicitly to someone such as Sergei Ivanov or Dmitry Medvedev, then the market will breath a sigh of relief that the more or less pro-business...(and) economically responsible policies of Putin will continue." Putin, apparently, is incredibly popular at home for standing up to the US and to "oligarchs" and should be able to shape the next government.

Brazil Political Movement to Watch for Next Election

If you own Brazilian stocks may want to know about the "Cansei" Movement.  The phrase translates as "fed up" and is an attempt to call President Lula da Silva to task for runaway crime and increasing disparity between haves and have nots.  It is likely to impact the next presidential election in 2010, and Dutch company Philips has already "joined" the movement.  BBC has good coverage of it:

http://news.bbc.co.uk/1/hi/world/americas/6950944.stm