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Brazil’s Infrastructure Plays Catch Up
May 20, 2010
Brazil has become one of the globe’s beacons of growth but in terms of infrastructure investment it needs to catch up to its peers.
As you can see from the two charts below, Brazil’s investment in its infrastructure has lagged that of emerging market leaders India and China, but it’s also lagged other Latin American countries like Peru and Mexico. In terms of investment-to-GDP ratio, Brazil averaged 17 percent over the past five years, according to a Morgan Stanley report, far behind China (44 percent), India (38 percent) and Russia (24 percent).
Brazil’s infrastructure investment as a percentage of GDP has been declining for some time. In the 1970s, infrastructure investment averaged 5.4 percent of GDP but that number has dropped off to just over 2 percent in the 2000s. This is considered just enough to maintain existing infrastructure, not enough for new projects or to fill new needs.
The U.S. spends roughly the same amount and we have our decaying infrastructure to show for it.
The Brazilian National Development Bank (BNDES) estimates that infrastructure investment could total more than $145 billion over the next three years alone. Morgan Stanley believes that this figure needs to double to 4 percent of GDP if the country is to achieve 5 percent annual growth for this decade.
So where is the $290 billion worth of investment needed?
Morgan Stanley says that the biggest opportunities are in roads, railways and ports. Because they’ve received little investment so far, ports and railways are projected to increase by 24.8 percent and 12.7 percent annually respectively for the next four to five years. In addition, we’ve seen firsthand the need for more airports and large-occupancy housing in its major cities.
Luckily, Brazil already has some drivers in place to increase investment. In addition to the second-edition of the Growth Acceleration Plan we discussed back in April (Brazil’s Plan to Accelerate Growth), Brazil will play host to the 2014 World Cup and the 2016 Olympics. Morgan Stanley also sees that the development of pre-salt oil reserves, a key driver of economic growth, will spur additional investment.
Our team’s visit to Brazil last November confirms the view that the country will benefit enormously from an upgrade of its infrastructure. It will take Brazil to the next level of economic development that will lessen reliance on commodities and diversify the engine of sustainable economic growth towards internal consumption.
The Six Key Drivers of Emerging Markets
April 23, 2010
Emerging markets are changing the way the world works by developing into global powerhouses. The latest edition of our “What’s Driving?” series identifies the six key drivers and the effect they have on the economic vitality of emerging markets.
- Rapid Economic Growth: In the coming years, growth in emerging economies is expected to outpace that of the developed world. This growth is fueling an increase in household income in places like China and India where nearly 60 million people—roughly the combined populations of Texas and California—are joining the ranks of the middle class each year.
- High Savings Rates in Asia: Despite rising consumption, households in emerging Asia save 17 percent of disposable income—that’s roughly four times what is saved in the U.S. and much higher than the developed world. These high savings rates allow them to meet the higher requirements for home ownership—many require at least 20 percent down—and have larger amounts of funds to invest in capital markets.
- Urbanization: The world’s urban population is growing by more than 70 million people each year. China already has over 100 cities with 1 million people and is expected to have over 200 of them by 2025. This urban migration has overwhelmed existing infrastructure like roads, sewers and electrical grids. The buildout of this critical infrastructure will require vast amounts of copper, steel and increase demand for all commodities.
- Desire for Social Stability: One main goal of emerging market governments to remain in power is to keep the public happy. They are doing this by increasing personal freedoms for citizens and providing them with opportunities to increase their quality of life. Many governments have found the key to social stability is focusing on job creation which establishes a path of upward mobility for citizens.
- Natural Resources Wealth: Many of today’s most promising emerging nations sit atop some of the largest oil, metal and other valuable resource deposits in the world. Many of these nations have teamed up with private and/or foreign enterprises to bring these resources to market. Revenue generated through taxation and direct ownership allows for these governments to build infrastructure, create jobs and pursue other economic opportunities.
- Corporate Transparency: A history of corruption and political turmoil has given way to higher standards of corporate governance in today’s globalized world. Though still far from perfect, the improved transparency and oversight has made important information available to investors and reduced uncertainty. By aligning themselves with international business standards and requirements, emerging nations will attract more foreign capital and better integrate themselves into the global marketplace.
These six drivers have helped emerging economies weather the financial crisis and provided them with a blueprint for success as they continue to strive to build economic wealth.
Click to Lauch Interactive Presenation
Don’t forget! Frank Holmes, Mark Skousen and the rest of the U.S. Global Investors Eastern Europe team will be hosting a special presentation on Thursday, April 29 titled "What's Ahead in Emerging Europe?" Click to register for this free event.
Global Recovery Strengthening
April 07, 2010
The OECD’s latest assessment sees a possible peak in U.S. unemployment and a rebound in business confidence for both the U.S. and Europe.
Of the G7 countries, Canada is forecasted to have the strongest rebound in terms of GDP (see table) growing by more than 6 percent during the first quarter of 2010, but all seven are expected to see growth through the first half of the year.
| Q1 2010 | Q2 2010 | ||
|---|---|---|---|
 |
United States | 2.4% | 2.3% |
 |
Japan | 1.1% | 2.3% |
 |
Germany | -0.4% | 2.8% |
 |
France | 2.3% | 1.7% |
 |
Italy | 1.2% | 0.5% |
 |
United Kingdom | 2.0% | 3.1% |
 |
Canada | 6.2% | 4.5% |
| G7 | 1.9% | 2.3% | |
| Annualized quarter-over-quarter growth Source: OECD |
|||
The assessment also pointed out that the rebound in OECD countries has largely depended on strong activity growth in Brazil, India, China and other emerging markets. “Trade linkages” between emerging markets and OECD countries has spurred on the global recovery because strength in one market is shared with many.
These linkages are evident in the swift rise in industrial production (IP). As the chart shows, each of the BRICs has experienced a significant bounce off lows in IP.
The OECD estimates the world trade volume growth will surpass 10 percent for both the first and second quarters of 2010. In addition, export orders will return to normalized levels during the second quarter for the first time since mid-2008.
The research group ISI recently reported that U.S. manufacturing PMI for exports surged to 61.5 percent in March. Meanwhile, global manufacturing PMI for exports reached a record level of 58.4 percent. Signs of the recovery also showed up in ISI’s company surveys, which showed strengthening in retailers, bank loans, engineering & construction companies and even auto dealers.
The OECD also highlighted how emerging markets bond spreads have narrowed. Since peaking above 800 basis points toward the end of 2008, bond spreads for both Asia and Latin America have dropped to roughly 200 basis points.
While these assessments are optimistic, the OECD offers a word of caution on the strength of the recovery. The “frail labor market” and removal of stimulus efforts pose a threat. They call for an “ambitious, clearly communicated” strategy to unwind the stimulus in order to not derail the recovery.
This note is especially important when considering the imbalance between emerging and developed economies. Many developed countries, like the United States, have accumulated large deficits fighting through the crisis and the effects of repairing these balance sheets will likely be felt in all markets.
The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The OECD is the Organization for Economic Cooperation and Development.
Chart of the Week: V-Shaped Recovery
April 06, 2010
If you want to see the right shape for an economic recovery, have a look at Turkey.
In 2009 the nation suffered its worst recession on record – its GDP shrank roughly 15 percent year-over-year in the first quarter of last year (see red line on chart below).
But since that bottom, Turkey has bounced back with a V-shaped recovery – in the fourth quarter of 2009, GDP grew 6 percent compared to a year earlier. The domestic market was the key – strong consumption growth (light blue bar) more than made up for a slight decline in net exports (dark blue) in the quarter.
Among the G-20 group of industrial nations, Turkey was second only to China in its GDP growth in the fourth quarter.
The chart also shows some of Turkey’s neighbors in emerging Europe and how they are mending their economies after the Great Recession. In both Hungary and Poland, the recovery is U-shaped, while the Czech Republic, Romania and Latvia are trending sideways in an L-shaped pattern.
Turkey’s growth pattern is likely to continue to stand out in the region. In addition to a vibrant export economy, growing household consumption is likely to play a significant role in the recovery in 2010 as Turkey can hope for more domestic demand stimulus than other countries.
For more insights into this promising region, we invite you to join us on Thursday, April 29, at 11 am ET for the webcast “What’s Ahead for Emerging Europe?” Registration is easy – just click here or on the banner below.
Brazil’s Plan to Accelerate Growth
April 01, 2010
President Lula de Silva of Brazil has big plans for his country’s energy sector.
Lula proposes to spend $255 billion on energy between 2011 and 2014, and another $344 billion in the years after that. The goal is to secure a reliable supply of energy, and would include expanded electrical grids, oil and gas exploration, renewable sources and improved energy efficiency.
Energy represents nearly 70 percent of the $872 billion allocated to Brazil’s latest economic growth program, known locally as PAC 2. Other areas of focus for the plan are housing, transportation and general quality-of-life improvements.
The need is certainly there – last fall we highlighted some of Brazil’s infrastructure gaps, as observed by our global strategist Jack Dzierwa when he traveled there.
But what about the funding? Brazil has a relatively small tax base and its public debt-to-GDP ratio of 67 percent is relatively high among other key Latin American economies. Lula’s plan would require a tax hike or more debt on the national balance sheet.
Another potential hurdle is this year’s presidential election. Lula can’t run again, but he is throwing his weight behind Cabinet Chief Dilma Rousseff – if Rousseff wins (she now trails in the race), the plan’s chances improve.
Net Asset Value
as of 09/08/2010
- Global Resources Fund
PSPFX $8.78 +0.05 - Gold and Precious Metals Fund
USERX $17.44 +0.03 - World Precious Minerals Fund
UNWPX $20.18 -0.01 - China Region Fund
USCOX $8.61 -0.02 - Eastern European Fund
EUROX $9.11 +0.13 - Global Emerging Markets Fund
GEMFX $8.17 +0.08 - Global MegaTrends Fund
MEGAX $7.71 +0.04 - All American Equity Fund
GBTFX $20.02 +0.09 - Holmes Growth Fund
ACBGX $16.04 +0.15 - Tax Free Fund
USUTX $12.58 -0.01 - Near-Term Tax Free Fund
NEARX $2.26 -0.01 - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change