The "right" Latin America will thrive in the New Year, fueled by ts own growth – with
an assist from the continued hot growth from China – while the "wrong" Latin
America will get left behind.
The second phase of emerging markets expansion is well on its way – a period
of self-sustaining growth, driven by consumer growth and infrastructure
spending. And Latin America, following China and other Asian economies, is one
of the key global pillars of growth that will save the global economy and the
U.S. financial system from total collapse. But not all the countries in Latin
America will go on to prosper. There is a wide gulf in the policies that will
continue to separate the winners from the losers.
Let me explain.
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In a recent article in our affiliated monthly newsletter
Money Map Report, Money Morning Investment Director Keith
Fitz-Gerald made three important points:
- The emerging markets (of which Latin America is the second-most-important
leg) will play a growing role in the continued long-term growth of the world
- The U.S. economy will continue to grow long-term, but its relative
importance in the world economy will continue to decline.
- In the near term, the emerging markets could well play a determining role in
keeping the overall global economy – and the U.S. financial system – from
dropping into a depression-like funk that we won't be free of for years.
Emerging economies in Asia and parts of Latin America have huge cash reserves,
much of which will be invested in infrastructure projects over the next 20
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In the next three years, China, alone will invest as much as $725 billion in
infrastructure, while Brazil will invest $225 billion for the same
This is important to remember, given that the dramatic sell-off the
emerging markets have experienced has many investors doubting the ability of
these countries to "decouple" from the global economy. The reality of the
situation is that most investors and pundits are failing to differentiate
between economic decoupling and market decoupling.
The Gloomy Present
While growth in emerging economies has dropped slightly, the prices of
securities and currencies in emerging markets has fallen drastically. Many
investors think that the U.S. economic crash will lead to a dramatic drop in
U.S. orders of emerging-market products, which will cause those economies to
drop off. That, in turn, would squeeze the profits and market valuations of the
companies that operate in these economies.
But that's a mistaken assumption. And here's why.
In Brazil, for instance, exports account for a mere 13% of gross domestic
product (GDP). In China, exports are just 10% of GDP. So some contraction in
U.S. and European orders can easily be counterbalanced by fiscal and monetary
stimulus in these countries.
On Oct. 27, in the depths of a rabid, indiscriminate sell-off, I published an
extremely bullish piece on Brazil. Since that article was published, Brazil
went on to rally as much as 47%. As of Friday's close – even after some
subsequent profit-taking – the exchange traded fund (ETF) that represents the
Brazilian market (ewz) is still up 21% (and
has risen as much as 42% since my recommendation).
And most emerging markets economies have plenty of fiscal and monetary
maneuvering room. Leading the pack is China, which accounted for some 27% of
global growth last year, and which has continued to use both fiscal and monetary
tools to keep itself on a solid growth path.
It recently slashed interest rates again, down to 6.66% (a lucky number in
the Chinese culture, meaning "things (are) going smoothly"). With record
foreign reserves of $1.9 trillion, China also approved a "fast and heavy-handed"
billion stimulus, mainly in housing and infrastructure, to be implemented
through 2010. And the Chinese yuan will drop almost 7% vis-a-vis the U.S.
dollar to cushion losses in trade. It has also lowered taxes on investments in
capital goods. And in a key move that's been almost totally overlooked by the
media, China has made huge market-oriented reforms in agriculture.
China has just allowed its 780 million farmers to rent, transfer or utilize
as collateral their rights to their lands and eliminated all taxes on
agricultural production and to farmers. This will allow for a massive increase
in the scale of production by consolidating companies. In this way, China will
keep its 120 million hectares dedicated to agriculture exclusively, with no
possibility of urbanization, while at the same time allowing the millions of
small farmers to sell out, and get capital to move to the cities. This will not
only increase the productivity of Chinese farming dramatically by allowing for
economies of scale to work and attracting billions in investments, it also will
create a huge incentive for these millions of farmers to move to the cities,
boosting housing and infrastructure demand.