Raphael Kassin: how to spice up your portfolio
Our expert EM debt columnist dishes the dirt on low yielding countries Turkey, Brazil and Russia and reveals the secret ingredient investors should be adding to their portfolio.
by Raphael Kassin on Mar 21, 2012 at 12:27
I have a personal policy of never paying for newspapers because I find the content and analysis (regarding investment management and emerging market countries) generally weak and biased.
Recently, I have found that three emerging countries – Brazil, Russia and Turkey – are occupying disproportionate space in the headlines. Since I follow these countries on a regular basis, I thought it would be interesting to review the reasons for their being in the limelight as representatives of the emerging markets.
Everybody in the investment community is talking about Brazil as if it were AAA rated (it is BBB). GDP growth of 7.5% in 2010 helped form that view. But growth sputtered to 2.8% in 2011 and is forecast to improve slightly to 3% in 2012, but I doubt it. Oil findings and mineral exports were a great force behind those numbers.
But let’s consider that the 2010 numbers were suspiciously helpful in maintaining Lula’s image, which in turn buoyed the next Workers’ Party candidate for president, Dilma Rousseff, who is now in power. With virtually no opposition, Lula’s favourite was easily elected despite having negligible political experience.
She has already had to fire seven of her ministers amidst scandals, a feat that would not have allowed her a long time in office elsewhere. However, amidst the euphoria foreign investors were wooed into numerous IPOs and creative investment opportunities, helping to balance accounts (current account -2.2% in 2010 and -3% in 2011).
And to add injury to the insult…
Somehow, Brazil managed to align the right stars and will be hosting both the 2014 Football World Cup and the 2016 Olympic Games. Need I say more about corruption?
Yes! I could not end without my coup de grace. Do you remember analysts’ claims that Argentinean inflation was wrongly understated? Well, 6.5% (reported) is certainly not how it feels in Brazil these days. Restaurant meals, construction materials, fuel, even bikinis are offered at such stratospheric levels that Brazilians travel abroad just to shop.
It pays off handsomely, with the benefit of having goods that are better produced by more efficient workers. Can we believe in the numbers or are they fictitious? The usual explanation for the high price level is: high taxes. The magic question then is: where are those taxes going?
Is there a home bias or is there a common thread amongst the three countries?
Enter Turkey’s Erdogan
Turkey does not have oil and that hurts. Since Europe is not too keen on Turkey’s entry into the Union, especially after PM Erdogan’s abrupt exit from an event in Davos, the ruling party found a solution to economic growth: diversifying its textile and primary goods economy into industrial products as well as diversifying its trading partnerships to include more countries in the Middle East (under the curious pretence of religion).
The result was excellent: GDP grew at 8.9% in 2010 and 8.2% in 2011. Unfortunately, GDP is forecast to grow a meagre 2.5% in 2012. However, the ruling party does not face re-election soon, continues to witch hunt those who once had its leaders exiled and curiously has managed to eliminate virtually all opposition from the press.
Middle Eastern investors were seduced to invest in Turkey, which will likely help the economy. The jury is still out but how about corruption?
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