My global team and I aren’t in a race to pick the world’s leading stock market.
But right now, the star performer happens to be my personal favorite: Brazil. (And soon, the spotlight could shift to another market I’ll tell you about in just a moment.)
Back in January, I told you Brazil was primed to be another “China-like miracle.” I explained why Brazil is one of the greatest beneficiaries of the China boom.
And I told you how Brazil’s ethanol explosion would help propel the country even further.
Plus, two weeks ago, I gave you a heads up that Brazil would soon be upgraded by a major U.S. rating agency.
Now, It’s All Happening!
Just this week, Standard & Poor’s surprised the financial markets with an upgrade of Brazil’s credit rating, immediately prompting another surge in Brazilian assets.
Brazil’s currency, the real, jumped by the most since September … hit a new six-year high … and busted through the 2-per-dollar level for the first time since 2001.
Its bonds jumped in value.
And its stock market, the Bovespa Index, jumped to a new record high.
Bottom line: This year, Brazil’s market is leaping forward at a pace that’s even exceeding the rapid rises in China and surrounding areas.
Just look at the numbers:
In Asia, exchange traded funds are linked to some of the strongest markets — like Hong Kong, Singapore and China — are up 15.7%, 23.8% and 25.3%, respectively.
Not too shabby.
But, in the same time frame, the ETF linked to Brazil’s market — the iShares MSCI Brazil Index — is up even more — 36.8%.
Had you invested $10,000 in the Brazil ETF on March 5, by this past Friday, you’d already be looking at a gain of $3,680 — in just two and a half months.
The Rise of Brazil and China
Should Come as No Surprise to You
The Money and Markets team has been telling you to expect this for many moons.
The big difference now is that, as we’ve been writing you more recently, each market is taking its turn shifting into higher gear and accelerating.
They ramp up to their launch pad. They consolidate for a short while. And then, one by one, they blast off.
This a very unique situation, raising two urgent questions for investors:
- What are the most powerful forces behind the blast-off in Brazil’s market this year?
- Which other market in the world currently benefits the most from similar forces? In other words, which one is likely to be the next to blast off?
No one has all the answers. And no answer can ignore the ever-present possibility of a correction, which typically comes without much warning. But in recent days, we’ve dedicated almost every waking hour to digging up the best answers we can to these questions …
What Are the Powerful Forces Behind
Brazil’s Market Blast-off This Year?
The first force is the underlying firmness of Brazil’s launch pad — its foundation for growth.
For several years, Brazil’s President, Luiz Inácio Lula da Silva, built that foundation by actually holding back the economy.
Instead of dishing out more money to the people for social welfare services, he paid off the country’s debt to the IMF.
Instead of stimulating more consumer buying, he built a huge trade surplus and made big headway in balancing the federal budget.
Instead of pushing for a bigger GDP, he focused on stabilizing the currency.
Each of these measures required Brazilians to make sacrifices. Each meant that the consumer had less money to spend … and that the economy had less fuel for expansion.
Result: For most of this decade, while China was growing by leaps and bounds, Brazil was lagging behind. But all that changed early this year, which leads me to …
The second force: New steps by Brazil’s government to unleash pent-up demand and let the economy start taking off.
Here’s how I explained it in January:
“Brazil is about to take off. Not someday in the future! Not if and when this or that problem is resolved! This year!
“The clincher: Lula’s second term in office, which began this month, helping to kick off a whole new series of economic reforms.
“Until now, Brazilian entrepreneurs had to plow through endless amounts of red tape to start a new business and then pay at least eight different taxes to operate one. But starting this year, they will enjoy vastly simplified rules for incorporation … just one, lower tax instead of eight … plus double the supply of credit.
“Also starting this year, investment in Brazil is likely to accelerate. Already, new projects approved by the national development bank have surged 36%. Ford and GM have committed billions to launch new auto models in Brazil.
“And most significant of all, investments in new Brazilian projects will reach 25% of GDP this year, similar to the levels that have prevailed in China and India.
“This investment explosion is key. Without it, China and India would not be where they are today. With it, Brazil is, right at this very moment, revving up for an economic take-off that could rival China’s and India’s.”
And now, the third force: International capital beginning to pour into the country.
Brazil’s currency, the real, is the strongest among all major currencies in the world this year. Its stock market is leaping ahead of all other major markets. And its long-term stability, a key requirement for investors around the world, is now being confirmed by the leading rating agencies.
Result: Instead of a sideshow in the global arena, Brazil is now in the spotlight, beginning to attract a torrent of international capital.
Just this week, for example, South Korean car manufacturer Hyundai announced plans to open a new facility in Brazil … Brazilian airline TAM announced signed a partnership agreement with U.S. carrier United Airlines … and a delegation of 16 Saudi businessmen, loaded with petrodollars, is sweeping through Brazil’s major cities, eyeing new investment opportunities.
Yes, there are bound to be bumps along the way. But in my view, what you’ve seen in Brazil so far has barely scratched the surface. Much of Brazil’s manufacturing power is still untapped. Most of Brazil’s natural resources are still unexploited. And most of the country’s arable land is still not cultivated.
Now, for the next question …
Which Market Is Likely to
Be The NEXT to Take Off?
Tony’s there right now.
He’s digging through the factories and talking to the floor managers.
He’s studying the numbers and kicking the tires.
He’s making sure that our research from afar matches the reality on the ground.
On the surface, what he’s looking at now couldn’t be more different from the country I’ve just told you about. Rather than vast open areas, Tony’s in one of the most densely populated areas of the world. Rather than giant Brazil, he’s in tiny Hong Kong.
But in terms of the forces we feel are about to propel Hong Kong’s market right now, there are some interesting similarities:
Like Brazil’s, Hong Kong’s economy has been lagging that of most of its neighbors.And although this city-state may be tiny in area, it’s a heavyweight economically. Indeed …
- In 2006, Hong Kong’s main stock exchange had a greater volume of initial public offerings — valued at $41.2 billion — than any other stock exchange in the world.
- Hong Kong’s economy is larger than Argentina’s, Thailand’s, Malaysia’s, or New Zealand’s.
- Hong Kong is the second largest venture capital center in Asia, managing about 27% of the total capital pool in the region.
- Overall, the Hong Kong stock exchange ranks seventh in the world in total capitalization.
Like in Brazil, free enterprise is a huge factor, although Hong Kong has long been the world leader in this aspect:
The Cato Institute … the Heritage Foundation … The Wall Street Journal … and virtually every major economic research organization in the world ranks Hong Kong as #1 in the world in terms of its free enterprise.
Their ranking is based on multiple factors:
1. Low taxes: The top corporate income tax rate in Hong Kong is only 17.5 percent compared to 35% in the U.S. Unlike Europe, there is no Valued Added or Sales Tax. And last year, the Hong Kong government abolished all inheritance taxes as well.
2. Business freedom: Starting a new business in Hong Kong takes an average of just 11 days, compared to the worldwide average of 48 days.
3. Freedom from government: Government spending in Hong Kong is 18.3 percent of GDP. In comparison, the U.S. government consumes 25.5% of GDP, the UK’s takes 37%, and France’s, 43.7%.
4. Investment freedom: There are virtually no rules against transferring currency in or out of Hong Kong, buying real estate, or repatriating profits.
5. Trade freedom: Other than duties on liquor, tobacco, oil and methyl alcohol, trade is virtually duty-free, and Hong Kong’s average tariff rate is close to zero percent.
Most important, like Brazil, we feel Hong Kong is now likely to attract a great influx of international capital.
According to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2006, Hong Kong is already Asia’s second largest destination for foreign direct investment — behind mainland China — and the sixth largest destination in the entire world.
In addition, Hong Kong companies invested $520 billion in inward (Hong Kong generated) direct investment, more than 293% of GDP.
Excluding tax haven economies, the Chinese mainland was the most important source of direct investment in Hong Kong (accounting for 31% of the total), followed by the Netherlands (8.1%), the US (5.1%) and Japan (3.2%).
And what has been a steady flow of investment dollars into the territory could now become a flood. Reason: For the first time, the Chinese government has just announced that it will allow domestic banks to buy overseas equities (especially those in Hong Kong).
The Chinese have the largest pot of currency reserves of any nation on earth. Now, we expect a large chunk of that cash is going to be pumped into Hong Kong stocks.
Tony’s watching Hong Kong’s Hang Seng Index market like a hawk and he will tell you more about his findings tomorrow.
In the meantime, take advantage of the Global Profit Bonanza I tell you about in my Saturday article.
Good luck and God bless!
Martin
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Kristen Adams, Jennifer Moran, Red Morgan, Adam Shafer, Jennifer Newman-Amos, and Julie Trudeau.
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