24 de Jul de 2017

Will Brazil be great again?

It depends on internal factors.

Por: Roberto Nemr
16/06/2017 às 17h49

Emerging markets [1], as a concept, started in 1987, which means they are currently completing 30 years. In 1988, the MSCI Emerging Markets [2], an index following the performance of these markets began to be measured. Initially this index included few countries and, surprisingly, Brazil and Malaysia accounted for almost 50% of the total, due to scarce liquidity in most emerging markets. China was virtually non-existent, as was India, while the South Korean market was relatively closed.

After this brief introduction, we will move forward in the timeline until the year 2008. In that year, commodities accounted for almost 50% of the MSCI index. Brazil had approximately 15%, and was more representative than China, due to the lack of liquidity offered by the Chinese market.

Now, let’s move forward a few more years in time, until the present day. Commodities, which used to be the main asset of the index, were reduced to only 15%. On the other hand, technology took a big leap and came to represent 25%.

In a regional level, Asia came to dominate, in absolute terms, participating with 70% of total, compared to 50% 10 years before. China, previously insignificant became the largest market with 25%, followed by Korea and Taiwan. Brazil, in turn, fell to 8%, almost half of the figure in 2008.

Six of the 10 largest companies in the MSCI Emerging Markets are in the technology sector, and the top four are: Samsung, Tencent, Taiwan Semiconductors and Alibaba. Six of these 10 companies are Chinese, two are from Taiwan, one is from South Korea and only one is from outside Asia, Naspers from South Africa, also in the technology area.

But what is the reason for this change? The fall in commodity prices as of 2011, with oil and iron ore prices falling from $ 150 per barrel and per ton to the current values of $ 50 / barrel and $ 60 / t respectively explain the débâcle of the weight of commodities and Brazil in the index.

But would the change in the weights take the seesaw to the opposite extreme again? Are we once again on the way to a new technology bubble, as in 2000?

Everything indicates that the answer is yes. Just take a look at the behavior of FANGS, the five largest US high tech companies + Microsoft, whose combined value has almost tripled in the last 5 years, surpassing $ 3 trillion.

We are talking about Facebook, Amazon, Netflix, Google and Apple, which are also among the largest companies in the world by market value. Among these companies, the oldest one is Apple founded in the 70s as Microsoft but which started its fly only 15 years ago, while all others have less than 20 years of history.

These companies are surely a revolution. However, by paying 180 times the profit for Amazon shares, the market is pricing for perfection, ignoring the risks of a new technology breakdown, increased regulation and taxation, or simply frustration with the results.

We do not believe there will be a new commodity boom, nor do we believe they will continue to fall. We also do not believe that technology shares will continue to perform much above average. Perhaps the future of emerging markets will really be with consumer companies, since the potential for population and income growth is concentrated in this part of the planet.

Despite representing 50% of world GDP, emerging markets are now only 10% of global capitalization. There is a long way to go, without ignoring the fact that the major multinational companies are based mostly in developed countries, which means that they are indirectly present in emerging markets.

Eighty percent of the world GDP growth comes from emerging countries, especially from Asia. Despite the deceleration of Chinese and Indian economies, the growth of these countries shall be greater than for the United States, Europe and Japan for a long period. This is due to the fact that per capita income in these countries is less than one-third of the per capita income of developed countries.

Therefore, we believe that Brazil will have much room for recovery, once the political and fiscal crises have been overcome. We will no longer have the commodities bonus, but we will still be a major agricultural producer and we will be able to increase our share in the oil and mineral markets. Our growth in planted area will keep us as the world’s granary and assure our external accounts, without leading to the Dutch Disease [3], the excess exchange rate appreciation.

Furthermore, it is noteworthy that the great success and growth of the Asian countries was due to investment in education, which is a key issue to date. Brazil took its first step in this direction, by approving the curriculum change. However, there is a long way to go before reaching the level reached by Asian countries.

All the same, parts of our industry and services can also recover their share in the world market. Brazil has a huge space of idle capacity, which allows us to grow without inflation and recover credibility in the debt curve.

We will not be able to regain the share we had in the 1990s, or in 2008, but we believe that Asia’s absolute dominance has probably peaked, especially with regard to technology companies. Reversal to the mean has already occurred with commodity companies, and should also occur with high tech companies. There is no fashion that produces a miracle in the long term.

[1] Nowadays, they are defined by the emerging countries, since they have a rapid economic, industrial and modernization growth.

[2] Index built by Morgan Stanley Investment Bank.

[3] In economics, Dutch Disease is the relationship between natural resources exports and decline in manufacturing sector. It usually occurs in countries that have abundant natural resources and export them in large quantities, leading to the exchange appreciation, which harms the competitiveness of their industrialized products.

Economista formado pela Universidade de São Paulo (USP) e consultor de investimentos para os mercados brasileiro e latino americano. Ex-diretor de portfólio para América Latina do Banco Itaú. Foi diretor geral da Genesis Investment Management.


Inflação em baixa no mundo (a de preços, não de ativos) cria estabilidade duvidosa

Vivemos situação de calma aparente.