Markets punish South America’s Bad and Ugly economies – BBC News 02-02-14

Salient to Investors:

Investors are abandoning emerging economies, good and bad, for the US.

Morgan Stanley said Brazil, Indonesia, India, South Africa and Turkey are the Fragile Five – all with large deficits, slowing growth and vulnerable currencies.

Argentina is generally credited with starting the general panic after playing fast and loose with its deficit and letting inflation take hold: government attempts to control the economy on a micro-level have been a failure. The Index of Economic Freedom says state interference has grown substantially since 2003, accelerating the erosion of economic freedom, while the judicial system has become more vulnerable to political interference, and corruption is prevalent.

Venezuela and Argentina have been economically mismanaged and are suffering as the great Chinese commodity cycle takes a downward path.

Brazil is unattractive. Elizabeth Johnson cites a fair amount of government intervention, and inflation is very high at 6%, though the Brazil Central Bank has taken tough action and put up interest rates. Johnson said fiscal adjustment is going to be difficult in an election year. However, Johnson said Brazil’s exports are too big to ignore, particularly agriculture, even with the commodity cycle on a downswing.

Brazil is the world’s biggest exporter of sugar, coffee, and beef and close to being the biggest in soya, chicken and corn – with this dominance a fall in the currency is only good news for exporters.

Brazil’s fall this year has been just 2% and appears manageable. Johnson says strategic foreign investors have not been disturbed by the last week’s panic as foreign direct investment has held up reasonably well, while investors in oil and gas, the agricultural sector, in tractor and car manufacturing, and wind power show no sign of concern.

Peter West at Poalim Asset Mgmt lists Mexico, Peru, Colombia and Chile as “good” emerging economies. he puts Mexico at the top of the list because it has been implementing reforms and because of NAFTA,  80% of its exports go to the US and will share in the recovery there.

Peru, Colombia and Chile have all benefitted from the commodity boom and are now being equally punished by the collapse – particularly in the copper price. West says they have done their homework, with inflation under control and some degree of fiscal discipline, and will separate from the Fragile Five, when the dust settles.

Read the full article at http://www.bbc.co.uk/news/25988823?print=true

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