China, Brazil seen as safer bets than U.S. stocks
By Walter Brandimarte - Analysis
NEW YORK (Reuters) - Chinese and Brazilian stocks are likely to emerge as strong performers in 2009, bolstered by aggressive government stimulus plans, even as the global financial crisis mauls equity markets worldwide.
They have, in fact, already become one of the biggest surprises so far this year, significantly outperforming the main U.S. stock indexes, a performance that underscores the shift in sentiment surrounding these once very risky markets.
"The case for optimism comes from the fact that these countries entered today's global crisis with better initial conditions," Mohamed El-Erian, chief executive at Pacific Investment Management Co, or Pimco, the world's biggest bond fund manager, said in an interview on Friday.
"That's partly as a result of their regulatory and policy reactions to earlier regional crises," El-Erian said, adding that these markets could easily outperform U.S. stocks.
The Chinese government has announced a package of measures worth more than 4 trillion yuan ($585 billion) to bolster domestic demand.
For its part, Brazil has increased by 142.1 billion reais ($59.5 billion) the size of a multiyear investment plan launched by the government in 2007. The program now totals 646 billion reais ($270 billion) in investment through 2010.
Markets have rewarded the stimulus measures so far.
The Shanghai Composite index .SSEC has risen 19.6 percent so far this year, while Brazil's benchmark Bovespa index .BVSP has lost only 1.2 percent. By contrast, the Dow Jones industrial average .DJI is down 24.5 percent this year while the Standard & Poor's 500 index .SPX has lost 24.3 percent.
If that were not enough, the MSCI world-wide stock index .MIWD00000PUS and the MSCI emerging-market stock index .MSCIEF have lost 23.2 percent and 7.8 percent, respectively, in the same period.
Speculation that China would double the size of its stimulus package was enough to send global markets soaring last week. The rally later fizzled out because no additional stimulus was announced, but Premier Wen Jiabao reaffirmed the government's growth target, saying it was still realistic for the Chinese economy to expand 8 percent this year.
The aggressive stimulus efforts are an attempt by both China and Brazil to boost domestic consumption and offset an unavoidable plunge in exports -- which provided a crucial tail wind for most emerging economies in recent years.
A larger-than-expected global recession, in fact, is now the biggest risk for the performance of Chinese and Brazilian markets, surpassing traditional political risks that often plague emerging countries.
China's export-oriented model will not change overnight, but its growing domestic demand should also support Brazil, which has the Asian nation as its third-largest trading partner after the United States and Argentina, said Rob Balkema, portfolio analyst at Russell Investments.
"Those are large countries with a better economic situation right now. If you look at GDP forecasts for 2010 for Brazil, China and even India, forecasts are still quite strong," said Balkema. He was referring to three of the four countries forming the BRIC group, which also includes Russia.
The IMF forecasts China's economy will grow 8 percent in 2010, while Brazil would expand 3.5 percent next year.
"PASSING OF BATON"
Moreover, large emerging economies such as China and Brazil will likely lead global growth within the next few years if they can keep expanding near current levels while the developed world struggles to emerge from recession.
"It's almost like the passing of the baton" from industrialized countries to emerging countries, said Tom Sowanick, chief investment officer at Clearbrook Financial, with $22 billion under management.
Sowanick bets China will be able to grow 8 percent this year because the Chinese government was "very aggressive and very early" in its stimulus package.
Another important reason is that credit markets in China and Brazil are still functional, providing much-needed financing to domestic companies.
Since the financial system in both countries was never too leveraged or exposed to U.S. subprime mortgage assets, bank shares have not been a drag in their stock markets, unlike in most developed countries.
Even as some analysts, such as Donald Straszheim, of Straszheim Global Advisors, believe China's target of 8 percent will hardly be achieved this year, they still see opportunities in specific sectors of the Chinese market.
"I think one should look very closely at big state-owned enterprises in China that are publicly traded," Straszheim said.
He added that he would be more inclined to buy Chinese oil companies CNOOC (CEO.N)(0883.HK) and Petrochina (PTR.N)(601857.SS) rather than American firms Exxon Mobil (XOM.N) or ConocoPhillips (COP.N).
"I believe the China's government will treat CNOOC and Petrochina better than the America's government will treat Exxon Mobil and ConocoPhillips" with financial support," he said.
Similarly, Brazil's national development bank, BNDES, said on Thursday it will provide state-owned oil firm Petrobras (PETR4.SA)(PBR.N) with the necessary financing for this year and the next, until it is able to raise cash on international capital markets on its own.
(Additional reporting by Jennifer Ablan; Editing by Dan Grebler) |
