The Rising Influence of Rising Affluence

[DewDiligence]

Brazil, U.S. Stocks Decouple

[Thanks to ‘elmatador’ on SI for this find.]

http://www.reuters.com/article/2011/05/24/us-markets-brazil-bovespa-idUSTRE74N3CK20110524

›Tue May 24, 2011 8:41am EDT
By Luciana Lopez

SAO PAULO (Reuters) - Brazilian stocks are emerging from the shadow of their U.S. counterparts.

Three years after the global financial crisis erupted, the two countries have had sharply divergent fortunes, now reflected in stock markets.

Brazilian equities are now decoupling from their old U.S. bellwether, a legacy of the global crisis that will likely persist in the wake of the deep changes in the relationship between the Western Hemisphere's two biggest economies.

When the 2008 global financial crisis plunged the United States and others into recession, Brazil had to sink or swim.

It swam, and how. The country ramped up exports to other nations; politically, Brazil further solidified ties to South American neighbors; and domestic consumption anchored a swift exit from a shallow recession.

The reward – in 2009 the Bovespa stock index surged 83 percent, more than triple the gains of the S&P 500. Conversely, this year the Bovespa is down 10 percent while the S&P is up 4.7 percent to near three-year highs on hopes of a U.S. recovery.

More and more, Brazil's equity market has become its own animal, with U.S. economic releases and corporate results no longer dictating the day's movements.

"The U.S. is still very important, but U.S. data-watching has become less of a market catalyst," said Will Landers, who runs $10.5 billion in Latin American stocks at Blackrock.

The change is visible: The 200-day correlation -- a measure of how tight the relationship is between two different assets -- between the Bovespa and the S&P 500 has dived. The coefficient has dropped from around 0.8 in March 2010 to –0.15 now, where 1 represents a perfect relationship and -1 a perfect inverse relationship. The –0.15 reading suggests the two are moving independently of each other [actually, it means the moves are weakly correlated in opposite directions].

Investors need to cast a wider eye in betting on Brazil, scrutinizing the country's economy more closely and looking to Brazil's expanding range of trading partners. In a powerful sign of Brazil's changing economic compass, China overtook the United States as its biggest trade partner in 2009.

The correlation has especially plunged over the past month as Brazilian inflation has sped above a government ceiling.

"The S&P will still be a good comparison, but it's not what it once was," said Alessandra Ribeiro, an economist with Tendencias consultancy in Sao Paulo. "We had really distinct stories during the crisis."

Many large emerging markets shook off the global crisis ahead of developed nations and are facing different problems.

Brazil, like fellow powerhouses India and China, is trying to fend off the price pressures that come with brisk growth, raising interest rates three times this year to 12 percent.

In the United States, where a recovery is still gaining traction, the central bank is keeping interest rates near zero with an eye to boosting growth.

"In the short-term, we've got some local issues, and the decoupling is going to stick around," said Julio Hegedus, chief economist with InterBolsa in Sao Paulo.

That mirrors a wider change among emerging giants. India's 30-share BSE index has become steadily less correlated with the S&P 500 this year.

THE GLOBAL TIES THAT BIND

With developed economies struggling, Brazilian companies have been knocking on other doors. Mining company Vale, the world's largest producer of iron ore, now counts China as its single biggest customer [this has been true for a while].

New highways through South America are also helping Brazilian businesses extend their reach through the continent, as Latin America's biggest economy tries to boost its regional influence.

"In the medium-term, Brazil-specific factors, especially fiscal and monetary policy (and) inflation, will be in my opinion the initial catalysts, after which it will go back to good old-fashioned stock picking," Landers added.

Another financial emergency, of course, could change the relationship again. Of late, the euro zone debt meltdown has rattled world markets, casting a shadow over global growth.

"If there's another crisis, another black swan event, that (decoupling) story goes out the window," said Kathryn Rooney Vera, an emerging markets strategist with Bulltick Capital Markets.

With the United States still the world's biggest economy and a major Brazilian trading partner, the two markets are likely to move more in sync as growth improves -- but not terribly soon.

"There's more independence in Brazil than there used to be," Hegedus said.‹