Archive for the ‘Global’ Category

Brazil: bubble?

Monday, December 20th, 2010

Scary article about Brazil in Bloomberg:

Late payments on credit-card and other consumer loans jumped 23 percent in November from a year earlier, the biggest increase since 2001, according to Experian Plc, a credit-risk consulting firm in Dublin. Brazil, the fourth fastest-growing of the Group of 20 nations, is also attracting a flood of foreign capital and facing its highest rate of inflation in five years.

A surge in credit-card issuance — tripling since 2003 to 153.4 million in circulation, according to the industry’s national association — has helped bring the debt load of Brazilian consumers to 18 percent of total disposable income, compared with 13 percent in the U.S., according to data compiled by Morgan Stanley.

Late payments rose for a seventh straight month in November, according to Experian, based on data from credit-card payments, bills for services and bank loans. Total consumer loan defaults — credit payments overdue for 90 days or more — fell to 6 percent in October, from 8.1 percent a year earlier, according to the central bank.

That’s a tell-tale sign of a bubble: unsustainable borrowing.

Brazil’s central bank is acting to prevent a credit bubble by raising reserve and capital requirements to slow consumer lending. Reserve requirements on time deposits will rise to 20 percent from 15 percent, and an additional requirement for non- interest-bearing accounts will climb to 12 percent from 8 percent. Banks will also have to use more capital to back consumer loans whose payment terms exceed 24 months.

Finance Minister Guido Mantega, who will keep his post when Rousseff takes office next month, said in a Nov. 30 interview that Brazil will cut funding for its development bank by 50 percent next year as part of a plan to slow public spending.

The government is also looking to rein in Brazil’s unregulated credit-card industry, Meirelles said in the interview last month. The central bank president said there should be more oversight and that a task force will study the need for government supervision.

It’s starting to sound a bit recessionary….

Adding to the credit anxiety are foreign investors lured by an inflation-adjusted interest rate of 5.12 percent, second only to Croatia among 46 countries tracked by Bloomberg. Investors “chasing yield” are taking the liquidity the Federal Reserve is pumping into the U.S. economy and investing it in emerging markets such as Brazil and China, where the payoffs are bigger, said Russ Certo, a managing director and co-head of rates trading at New York-based Gleacher & Co.

The Fed is “sowing the seeds of the next volatile moves in markets because these policies are destabilizing,” Certo said. “These economies are afraid of what happens when all this hot money leaves, because when it leaves, it’s going to be tumbleweeds.”

Speculation fueled by easy money, in this case low interest-rates in the US, is another sign of a bubble. On the other hand, the Brazilian stock market has a low PE ratio, at around 14. If there is a bursting bubble, money will flow back into high-quality, boring stocks, the dollar and the yen.

International Oil (Russia, Brazil, Australia)

Sunday, December 12th, 2010

These countries have cheap stock markets (i.e. low average PE ratio) and plentiful natural resources:

  • Russia (RBL, RSX, CEE)
  • Brazil (EWZ, LAQ)
  • Australia (EWA, KROO)

CEE and LAQ are closed-end funds (CEF) that invest in Eastern Europe and Latin America, with high concentrations in Russia and Brazil. However, neither CEF is trading at a juicy discount at the moment. KROO has a higher weighting in natural resource companies than EWA; the latter is overweighted in banks, bad because Australia’s housing market looks bubbly.

Fund managers like Russia and Brazil:

According to the latest UBS survey of top fund managers, 48% say Brazil will deliver the best performance in Latin America, Europe, the Middle East or Africa next year — but 33% are going with the emerging consensus and saying they think Russia will win the prize.

However, OPEC seems to be of the opinion that the current $90 oil price is overpriced, and the fair-value range is $70-$80. See the Bloomberg story: OPEC Dismisses $90 Oil Price as ‘Blip,’ Maintains Output Quotas

Source for international PE ratios is the Financial Times. Peru and Canada are resource-based economies that look overpriced.

Disclosure: I own EWZ.