Global Investing

Lower rates give no respite to Brazil stocks

In normal times, an aggressive central bank campaign to cut interest rates would provide fodder for stock market bulls. That’s not happening in Brazil. Its interest rate, the Selic, has fallen 350 basis points since last August and is likely to fall further at this week’s meeting to a record low of 8.5 percent. Yet the Sao Paulo stock market is among the world’s worst performers this year, with losses of around 4 percent. That’s better than fellow BRIC Russia but far worse than India and China.

Brazil’s central bank and government are understandably worried about a Chinese growth slowdown that would eat into Brazilian commodity exports. They are therefore hoping that rate cuts will prepare the domestic economy to take up the slack.

But the haste to cut interest rates appears to have spooked some foreign investors, with many seeing the moves as evidence of political pressure on the central bank. A closely-watched survey from Bank of America/Merill Lynch showed that fund managers had swung into a net 14 percent underweight on Brazil in May from a net overweight of over 20 percent in April (See graphic). This is the first time investors have turned negative on Brazil since February 2011, BofA/ML said.

Brazil is the least favoured BRIC play forNick Timberlake, who oversees more than $10 billion in BRIC equities at  HSBC Global Asset Management. It accounts for just 17 percent of the portfolio (India is 22 percent, China 29 percent and Russia 31 percent). That’s because:

Valuation signals in Brazil and companies’ profitability are not as strong as the other BRICs…and it’s fair to say there are question marks over the independence of the central bank.

Three snapshots for Wednesday

On Friday 283 companies in the S&P 500 had a dividend yield higher than the 10-year Treasury yield, at yesterday’s close this had fallen to 266 but remains very high compared to the last 5-years.

Italian consumer morale plunged to its lowest level on record in May as Italians’ pessimism over the state of the economy plumbed new depths.

Germany set a zero coupon on its new Schatz, the first time it has done so on debt of such maturity. The bid to cover ratio for the new bond at the auction was 1.7, compared with 1.8 at a sale of two-year debt on April 18.

Three snapshots for Thursday

Fears that Athens is on the brink of crashing out of the euro zone and igniting a renewed financial crisis have rattled global markets and alarmed world leaders, with Greece set to figure high on the agenda at a G8 summit later this week. This chart shows the impact on assets since the Greek election:

Euro zone banks now account for only 8% of total euro zone market value – they were over over 20% of the market in 2007:

Japan’s economy rebounded in January-March from a lull in the previous quarter, shaking off the pain of a strong yen and Europe’s debt crisis on solid consumer spending and rebuilding from last year’s earthquake.

Three snapshots for Tuesday

The euro zone just avoided recession in the first quarter of 2012 but the region’s debt crisis sapped the life out of the French and Italian economies and widened a split with paymaster Germany.

Click here for an interactive map showing which European Union countries are in recession.

The technology sector has been leading the way in the S&P 500 in performance terms so far this year with energy stocks at the bottom of the list. Since the start of this quarter financials have seen the largest reverse in performance.

Three snapshots for Wednesday

This chart shows the wide dispersion in equity market performance so far this year. In local currency terms Korea has a total return of nearly 12% and Germany over 10%, this compares to Italy at-6% and Spain at -16%.

In contrast to last year, this has driven average correlations between equity markets lower.

However, correlations may well pick up if markets move back into ‘risk-off’ mode. The chart below showing the weakness in the Citigroup G10 economic surprise indicator seems to be pointing towards further weakness in bonds relative to equities.

In India, no longer just who you know

It’s not what you know but who you know. There are few places where this tenet applies more than in India but of late being close to the powers in New Delhi does not seem to be paying off for many company bosses.

Look at this chart from specialist India-focused investor Ocean Dial. It shows that since mid-2011 companies perceived as politically well-connected have significantly underperformed the broader Mumbai index. The underperformance has intensified this year.

According to David Cornell, portfolio manager at the fund, this is down to several factors such as The Right to Information Act which has helped curb unfettered corruption as well as shifting political power away from the centre towards provincial governments.  He says:

Trading the new normal in India

After a ghastly 2011, Indian stock markets have’t done too badly this year despite the almost constant stream of bad news from India. They are up 12 percent, slightly outperforming other emerging markets, thanks to  fairly cheap valuations (by India’s normally expensive standards)  and hopes the central bank might cut rates. But foreign  inflows, running at $3 billion a month in the first quarter, have tapered off and the underlying mood is pessimistic. Above all, the worry is how much will India’s once turbo-charged economy slow? With the government seemingly in policy stupor, growth is likely to fall under 7 percent this year. News today added to the gloom — exports fell in March for the first time since the 2009 global crisis.

So how are fund managers to play India now? According to David Cornell, who runs an India portfolio at specialist investor Ocean Dial, they must simply get used to the “new normal” — subpar growth and high cost of capital. In this shift, Cornell points out, return on assets in India has fallen from a peak of almost 14 percent in 2007 to less than 10 percent now. While that is still higher than the broader emerging asset class, the advantage has dwindled to less than 1 percent as companies suffer from margin compression and falling turnover. Check out these two graphs from Ocean Dial:

Cornell is playing the new normal by focusing on three sectors — consumer goods, banks and pharmaceuticals. These companies, he says, have pricing power and structural barriers to entry (banks); provide access to still-buoyant demand for services such as mobile phones (consumer goods) and are well-run and profitable (pharmaceuticals). And the export-oriented pharma sector is also an effective hedge against the weakening rupee.

Three snapshots for Friday

The U.S. economy expanded at a 2.2 percent annual rate in the first quarter, slightly weaker than expected.  Consumer spending which accounts for about 70 percent of U.S. economic activity, increased at a 2.9 percent rate – contributing two percentage points to the overall growth rate.

Sell in May and go away? Here are the average numbers for the MSCI world equity index:

More awful economic numbers from the euro zone, Spanish unemployment hit 24.4% in Q1 2012 with youth unemployment rising to 52%.

Turning point for lagging emerging stock returns?

Over the past year emerging markets have broadly lagged an upswing in global equity markets, yielding cumulative returns of 4.5 percent since last August. That’s less than half the return developed markets have provided (see graphic below).

But there are two reasons why a  turning point may be approaching. First the positioning. Foreign holdings of emerging equities have plunged in the past six months and according to research by HSBC they are at the lowest in four years. That’s especially the case in Asia, where fund managers have been jittery about China’s growth slowdown.

International funds appear to have responded aggressively to signs of a slowdown in emerging market economies, the bank observes, adding:

Three snapshots for Thursday

Weaker than expected economic data has pushed Citigroup’s G10 surprise indicator into negative territory. The indicator has tracked closely with the relative performance of equities vs bonds:

Italian business confidence fell unexpectedly to its lowest level in two and a half years on Thursday. Business confidence has historically given a good lead on GDP growth suggesting further weakness to come.

An update on currency moves against the dollar this year. Hungary tops the list, the EU opened the way to talks with Hungary on financial aid on Wednesday, ending a five-month dispute over the independence of its central bank. The UK pound and the euro remain positive for the year despite the UK falling back into recession and the continued euro zone crisis.