The Emerging Market Party is Not Over

By Rudy Martin | 2008-08-03

Since the stock market top in June, the shares of the leading Brazilian companies have declined 20% within the last two month period. Is the correction in this hot market over or just beginning? Here are some thoughts about why this emerging market may still have some upside and a cooling off of expectations may actually be a good thing for longer term investors.

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Take a look at the price chart of the iShares MSCI Brazil Index fund (NYSE:EWZ) for a record of where the top Brazilian stocks have been. From September through June these stocks basically doubled in value.

It is natural to expect some type of pullback as investors have been taking profits in these stocks. According to global funds flow data from EPFR.com, over the lasting 18 days money has been flowing out of the 46 major funds they track in the Latin American funds category.

The question is where is all the money going?

Over the past month, one net winner has been China. The iShares FTSE/Xinhua China 25 Index Fund was up 5% in July versus a 10% drop in value for the Brazilian ETF. Obviously the focus on the Olympics has helped some become more comfortable story of Chinese economic growth. One rating agency, S&P, announced last week that it was increasing China’s sovereign rating to A plus. It noted the country’s strong external assets, economic growth potential and improving government finances. This should boost investor confidence, but is not likely to have much more impact on future investment fund inflows. The big run in that stock market occurred in October of last year and the China growth rates have already started to cool.

Another change over the last month has been the recent drop in oil prices. Whether these energy cost declines are temporary or not, this seems to be fueling a modest increase in risk appetite among investors. The best performing Brazilian stocks last month were in transportation, chemicals, which benefit from lower petroleum prices and aerospace. The net picture here is one of investor rotation into less energy-dependent Latin stocks for now and China – the country Brazil wants to make its largest export trading partner.

Company News Headlines

• Petrobras to Start Oil Output at Tupi Field in 2009

• EMBRAER SEES GLOBAL DEMAND FOR 13,150 BUSINESS JETS THRU 2017

• Vale Debt Rating Raised to BBB+ by Standard & Poor's

• Cemex to Raise Concrete Prices at U.S. Unit by $25 a Cubic Yard

General News

• Last month, Brazil's central bank, raised interest rates more than expected for the second time in three meetings, signaling it's ready to push up lending costs faster to fight inflation. The currency rose to a nine-year high.

• The emerging capital markets rose last week. The average Large Cap Latin Beat Universe Stock gained 1% last week and is now down 7% year-to-date. Stocks with gains for the week totaled 69 and losers totaled 48, indicating a continuation of the firming. Among the gainers were the airline stocks Lan (NYSE:LFL) up 8% on lower oil prices. The worst performing stock was Mexico’s leading construction company Empresas ICA (NYSE:ICA). Its margins were affected by rising steel costs and other raw materials, leading to an unexpected drop in reported second quarter earnings.