Latin America is widely regarded as a growth play in the equity markets. The explanation for this view is that the region is a commodity producer -- agricultural goods in Brazil and Argentina, metals in Brazil, Chile and Peru, oil in Venezuela and Ecuador, natural gas in Bolivia, etc.
In general, that's a fair vision. However it must be better understood. Not all commodities are the same, and not all countries have the same economic policy or the same stage of development
It is well known that there is a high correlation between economic growth and commodities prices. In the past few years, this correlation has increased since the main source of growth was the emerging economies, in which economic growth is more intensive in commodities. For the future, we expect this correlation to increase even more, as emerging economies will keep on leading the growth and developed economies, particularly the U.S., will rely a lot on government investments in infrastructure.
It seems that the scenario is not bad for basic material producers -- it is undeniable that economic growth in the near future will be very commodity-intensive. However, the basic question remains: Will there be any economic growth?
The first days of 2009 showed how the market is aware of this high correlation. The expectation for a new economic package in the U.S. as soon as President-elect Obama takes office has created a more positive environment for basic material producers. Mining companies like Vale do Rio Doce (RIO) and Companhia Siderurgica Nacional (SID) went up 24.8% and 29.3% in just 3 days! The Brazilian currency, which is also a good measure of the international demand for basic materials, went up 7.2% against the U.S. dollar.
The emergence of the war in the Middle East also influenced oil prices and led all commodities to move ahead. Nevertheless, we understand that the major force behind this huge movement in the beginning of 2009 was the expectation for President Obama's economic plan and the depressed prices of most commodity stocks.
After a crazy three days, we would advise some caution. Even if Mr. Obama's plan is strong enough, it will take some time for it to deliver results, and in the short-term there will be the negotiation between iron ore producers and Chinese steel companies.
Until recently, there was an expectation that iron ore prices would be cut as much as 30%.
