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Risk and Recovery in Russia

    August 06, 2010

Risk and Recovery in Russia 080610Russia has a lot of upside, and a big part of why is the risk trade.

Russia was one of the top emerging markets in July, rising 10.3 percent as risk tolerance came back into the market.

And we think this upward trend can continue – Russia has a lot of catch-up potential. Its stock market remains 51 percent down from its May 2008 peak despite a 143 percent rally from its bottom in January 2009, according to Credit Suisse.

While the other BRICs have taken measures to keep their economies from overheating, Russia is just starting to benefit from stimulus implemented during the crisis.

Rising consumer demand accelerated GDP growth to 5.4 percent during the second quarter, and we think the consumer story is just getting started. Money supply is growing at a historically high rate of 30 percent, which should grease the economic engines for further expansion during the back half of the year.

U.S. dollar strength had been a headwind for Russian markets but that appears to have reversed. We’ve also seen a turnaround in the banking sector, which has historically been a positive for emerging markets.

The Russia story is just catching on. Capital inflows have been slightly positive so far in 2010, but still lagging the 2006-07 period, when monthly inflows exceeding $150 million were not uncommon.

Despite the promising outlook, some potential hurdles remain. For instance, to raise capital, Moscow is selling $35 billion of its equity in Russian companies between 2011 and 2013. This large amount of shares could pressure equity markets until this overhang is removed.

BRIC refers to the emerging market countries Brazil, Russia, India and China.

 

Chart of the Week: Emerging Europe

    July 14, 2010

Weakness in the euro is a strength for Emerging Europe.

A strong currency tends to make exports more expensive, but Germany (the world’s #2 exporter behind China) remained globally competitive even as the euro’s value climbed to record highs against the U.S. dollar.

One of the key reasons: German manufacturers cut costs by shifting some production to Emerging Europe, where skilled workers are readily available at a far lower wage. The Czech Republic, Poland and other Emerging Europe countries send semi-finished goods to Germany, where they become finished products for export, primarily to Asia and North America.

According to some estimates, this strategy has raised the productivity of the German parent companies by 20 percent.

EM - Euro Budget 070910

The euro has depreciated in recent months due to worries about the massive sovereign debt loads in Greece, Spain and other countries. Emerging Europe, by contrast, has much lower debt-to-GDP ratios, which enables higher growth rates.

The weaker euro has helped German exporters by making their products less expensive abroad, and as we pointed out in our latest Weekly Investor Alert, Emerging Europe has also gotten a lift.

The chart above shows the industrial production growth trend (rolling six months) for several Emerging Europe countries, along with Germany’s export growth outside the European Union.

Germany’s overall exports rose 9 percent in May to $98 billion, and were up 29 percent through the first five months of 2010. The government in Berlin now envisions GDP growth of 2 percent this year, higher than the official estimate of 1.4 percent – this would further benefit Emerging Europe.

 

G-20 Dodges Deflation

    June 28, 2010

G20 Toronto Summit - 062810While I didn’t like the senseless destructive behavior outside the weekend’s G-20 gathering in my native Toronto, I did like some of the constructive results that emerged from the meeting.

The risk of dangerous deflation in the developed markets is still very real, so it’s a good move by the debt-loaded members of the G-20 to take a balanced approach to cutting their deficits by half by 2013, gradually reducing their stimulus spending and stabilizing debt burdens by 2016.

At the same time, the countries also committed to growth as a top priority – had they imposed harsher fiscal and monetary terms, capital could have been choked off and the potential for growth gravely threatened.

While inflation remains a significant risk in the long term, given all of the economic stimulus money in the system, right now the bigger hazard is deflation.
The big problem with deflation is that once that cycle is under way, it is very difficult to get out of. Just look at Japan – consumer prices there have fallen for 15 straight months and pessimism is running high.

Falling prices may sound like a good thing, but when people see falling prices, they delay their spending because they want to see if prices will fall even more. This waiting game further slows economic activity and raises unemployment in a crippling circle.

Stubbornly high joblessness is plaguing the U.S., and it may worsen now that the boost from Census Bureau work is winding down – nearly a quarter-million temporary Census jobs have ended this month. On top of that, more than 1 million Americans are at risk of losing their unemployment insurance and health benefits as of July 1.

We believe strongly in government policies as a precursor for change.

Every member nation of the G-20 acts in its own economic self-interest; however, they also recognize a broader interest. Had they as a group opted to be more austere, the multiplier effect (the G-20 represents 85 percent of the global economy) would likely have been severe.

 

Laughing at Europe’s Bailouts

    May 27, 2010

Abbott and Costello 052710Remember the old Abbott and Costello routine “Who’s On First?”

Australian political satirists John Clarke and Bryan Dawe recently put together a modern-day version of that 1940s vaudeville classic with a rapid-fire shtick that pokes edgy fun at how much of Western Europe found itself buried under trillions of dollars in sovereign debt, and the scant likelihood that this debt will ever be repaid despite the European Union’s $920 billion bailout plan.

Clarke at one point summarizes the issue with this Costello-esque query: “How can broke economies lend money to other broke economies who haven’t got any money because they can’t pay back the money the broke economy lent to the other broke economy and shouldn’t have lent it to them in first place because the broke economy can’t pay it back?”

All jokes aside, the Aussies are spot-on with their assessment of what’s troubling Europe. Sovereign debt for Germany, France and the UK is above 80 percent of projected GDP for 2011, and these countries are the relatively healthy ones.

Several eurozone nations are still teetering under their debt burden, which could lead to more massive bailouts and a threat to the future of the euro, not to mention the risk of a contagion that could reverse the global economic recovery.

Watch the video.

By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.

 

Chart of the Week: Emerging Europe Exports

    May 26, 2010

This week’s chart from Citigroup looks at Emerging Europe’s exposure to the risks posed by Western Europe’s sovereign debt woes.

EM - Hungary and Czech Republic 052110

The European Union is the primary export market for most of the countries of Emerging Europe, so any weakness in the euro makes their products more expensive for EU residents.

The greatest EU exposure, according to Citi’s research, is faced by the Czech Republic – nearly 70 percent of the nation’s GDP is export-dependent, and about 85 percent of its exports go to the EU. Hungary is nearly in the same position.

Citi points out that this exposure may not be as severe as it appears. Much of the export volume from the Czech Republic and Hungary goes to the EU (particularly Germany) as components for finished products that are then exported. The weaker euro would benefit EU exports, which stands to insulates component suppliers from Emerging Europe to some degree.

At the other extreme in the chart above falls Turkey, whose economy is less reliant on exports than the rest of Emerging Europe, and Ukraine, whose top trade partner is Russia.

Citi also says that Emerging Europe on the whole has little risk of the same sort of public-debt contagion that has the EU ailing and vulnerable. The 2008-09 credit crisis hammered Emerging Europe because of the region’s private-sector debt burdens, not its sovereign debt.  A possible exception could be Hungary, whose public debt-to-GDP ratio is close to the EU average.

 

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