SPEAK to any strategist at any investment bank and you will hear the common refrain that emerging markets will drive the global economy in 2010. While this is undoubtedly true, there is a tendency to blindly associate emerging markets with Asia – and China in particular. Spread betters should make sure they consider the whole range of emerging market indices that are available.
Emerging Asian countries certainly played a major role over the past year in helping to stabilise the global economy so upside is limited – the Shanghai 180 stock index has risen 75 per cent year-to-date while India’s Nifty 50 has surged 63 per cent.
According to research by Bank of America-Merrill Lynch, Asia has outperformed emerging Europe, Middle East and Africa (EMEA) and Latin America by more than 30 per cent over the past 10 months. But this outperformance may be drawing to a close as higher oil prices hit Asian tigers’ terms of trade and hard-hit Latin American countries start to rebound.
Spread betters should therefore start taking a closer look at Brazil – you can take out positions on futures of the country’s Bovespa index through providers such as Saxo Bank and Capital Spreads.
With Saxo Bank, the Brazil index future can be traded between 1.05pm to 9.15pm but given the relative illiquidity, the spread is high at 60 basis points.
Brazilian stocks have also seen sharp rises over the past 10 months, prompting some investors to question whether the market has got ahead of itself. Indeed, at first glance Brazil seems quite expensive historically at its current price/earnings (p/e) ratio of 13.6 times.
But HSBC’s head of research for Brazil, Alexandre Gartner, argues that there are several underlying conditions that would support higher valuations – Brazil’s lowest-ever domestic interest rates at 8.75 per cent, high worldwide liquidity, and increased awareness of Brazil as an alternative investment. And on sector-adjusted forward p/e ratios, Brazil is only slightly more expensive than Mexico and cheaper than most Asia-Pacific countries.
And whereas Asian countries will be hit by rising commodity prices, Brazil as a net exporter of commodities should benefit from rising oil and iron ore values.
After looking east for so long, spread betters might consider Latin America in 2010 for emerging market exposure.