Monday, August 17, 2009

China & Brazil Stock Markets - Fading Fad or Growing Opportunity?



This morning I took a look at the relative market performance of the Chinese, Brazilian, and US stock markets over the last 5 years. (link to dynamic chart). Looking at their return over both boom and bust periods and correlating it to fundamentals was instructive.

In the 2001/2 recession these markets were either small or non-existent from an international investment perspective. This last year was the first recessionary period that these markets have weathered as "major" markets. If you invested in China or Brazil in 2008 or 2007 your investment is lying bleeding and tattered on the ground, with 60-80% declines. On the other hand, if you invested early in the cycle - say in early 2005, you're up around 150%.

Looking at fundamentals, the Chinese economy (GDP) grew at 6% Y/Y over the last 1 year recessionary period and closer to 9% Y/Y over the last 5 years. US GDP in contrast grew at around 2.4% annually over the last decade. So its no surprise that the Chinese stock market has dramatically outperformed the US market over the last 5 years. The Brazilian economy grew at around 4.7% over the last 5 years and its stock market similarly out performs the US market over that period.

The data supports the idea that these growth economies are better long-term investment opportunities than the US market. If your investment horizon is say 10 years and you don't like playing momentum, this might be a good time to invest since both China and Brazil are down dramatically from their highs. On the other hand, these markets have not decoupled from the US market - if the US market moves down 10%, these markets will probably move down 30 or 40%. If you believe the US market will take a second dip in the near term, the best time to invest may be 6-12 months in the future.

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