This headline was located on the front page of “The Wall Street Journal” Monday, May 11, 2009.
The article outlines how investors worldwide are piling money back into markets; markets many thought were too risky only a few short weeks ago. This has caused stock prices to increase in several markets. Brazil’s Bovespa stock index is up 75% since its October lows. Across the emerging-market world, stocks are up 50% since the beginning of March, according to the MSCI Emerging Markets Index which tracks 23 different markets worldwide. (Source: “The Wall Street Journal” 5/11/2009)
In early May, investors deposited about $4 billion into emerging market funds, the biggest week for these types of funds since late 2007 and their eighth largest week ever according to Bank of America – Merrill Lynch. At the same time, investors withdrew $9.8 billion from US funds over 7 weeks.
Robert Weissenstein, chief investment officer at Credit Suisse’s private bank, believes the reason for the sudden investment in emerging markets is investors’ renewed belief economies of countries such as Brazil and China will grow faster than those of the developed world. Barring unforeseen events, Weissenstein says, “The black hole in front of us is gone,” referring to the broader threat of the possible collapse of some economies or markets.
Others, however, are more cautious. Brazilian central banker, Henrique Meirelles, recently told a conference audience, “The excess of optimism is dangerous and could lead to disappointment the first time there is a negative number. Brazil is showing signs of recovery on the margins, but that doesn’t mean (the crisis) is over.” (Source: “The Wall Street Journal” May 11, 2009)
Things are certainly changing.
Just 6 months ago, Brazil’s currency, the Real, was falling. Recently, however, Brazil jumped into its currency markets on two different occasions to prevent the Real from strengthening too quickly against the US Dollar. (Source: “The Wall Street Journal” May 11, 2009)
Investors who have been accumulating US Dollars and Japanese Yen are now moving at least some of those assets into foreign stocks. An index comparing the strength of the US Dollar to a basket of foreign currencies found the US Dollar 7.5% lower since March 5, 2009. Recently, the dollar also traded lower against the Euro, reaching a 7-week low. (Source: “The Wall Street Journal” May 11, 2009)
Resumed economic activity in China and a weaker US Dollar typically mean higher commodity prices. Since most commodities are priced in US Dollars, the weaker the Dollar, the higher commodity prices may go. And, when China’s economy is humming along, its economy ranks among the world’s strongest, consuming significant amounts of oil, metals and raw materials. Increased demand also typically pushes commodity prices higher. Recently, crude oil prices reached a 6-month high of $58.63 per barrel, while natural gas prices jumped 21%. (Source: “The Wall Street Journal” May 11, 2009)
None of this comes as a total surprise. In the January and March Market Update (click here for a copy) www.usawealthmanagement.com), I outlined my belief foreign economies would rebound more quickly than the US economy and the US Dollar could weaken long term against other world currencies. In my opinion, you’re seeing the beginning of that trend; however, I’d be careful about jumping into these markets ‘with both feet’.
From my experience, world equity markets are somewhat correlated. And, I believe there may be more trouble ahead for equity markets. More on this in my next post.
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