Tags: Take | Profits | Emerging | Markets

Time to Take Profits in Emerging Markets

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Friday, 18 Dec 2009 08:19 AM Current | Bio | Archive

Yesterday, we saw Panama’s $760 million bond offering fail, which caused the worst bond rout in nine months. In the evening, Nouriel Roubini, professor of economics and international business at New York University gave before the Council of the Americas in New York an interesting speech titled: “Global Economic Outlook: What are the Implications for Latin America?”

Roubini said that the Brazilian currency is overvalued after advancing more than 30 percent against the dollar so far this year, which makes it the best-performing currency of all the emerging economies in the world.

International investors should, in my opinion at least, temper their enthusiasm for further investing in developing countries like Brazil, and it would certainly not hurt their profits considering to cash in some of the profits they’ve made this year.

There is no doubt that Brazil’s economy can grow more than 6 percent a year if, and that’s a big if, the government makes structural changes to education and infrastructure. Don’t overlook that President Luiz Inacio Lula da Silva has failed so far to push changes through.

Nobody can deny that Brazil’s economic outlook depends on its capacity to pass new laws. The country won’t be able to grow more than 4.5 percent annually if it doesn’t approve much-needed new legislation, and that’s a real gray area.

Besides all that, it’s also a fact that there’s probably too much capital inflow to Brazil and strengthening of its currency is too strong on the basis of Brazil’s long-term fundamentals. Yes, I agree with Roubini, and I’m positive on Brazil, but not as euphoric as a large part of international investors are at this moment.

If we see acceleration in reforms, Brazil’s future will be very, very bright. But, we aren’t there yet, and not by a long shot. All investors should take into account that Brazil’s as well as worldwide macroeconomic conditions; company earnings and economic growth are going to be less positive than expected.

It’s in fact very simple: At this moment, risky assets are overpriced everywhere, and we can expect a adjustment to reality. I expect that to happen during the first half of 2010. We should not forget that most developed economies, and that includes the United States, which is about 25 percent of world GDP, will experience an anemic recovery, as consumer spending growth, because of consistent high unemployment, will be slower than growth in gross domestic product.

Global markets have rallied too much, too soon, too fast in 2009, but I don’t expect a correction to happen right away. The still cheap dollar, notwithstanding its recent rise, will continue to entice investors to seek higher-yielding assets for some months more. We all know this will come to an end and that could be more abruptly than most think. Remain vigilant.

Bottom line: If I had profits to take in emerging economies, I would take money off the table. That includes Brazil and, of course, China, and I would keep it liquid in the short term and in safe U.S. dollar instruments for the time being.

This brings us to the U.S. markets yesterday and especially to the S&P 500, mirrored in the exchange-traded fund (ETF) SPY. We saw the SPY gapping down from trading range resistance to the mid-point of the five-week high-low range . The range low is 108.12, the high is 112.38 and the mid-point line is at 110.25. SPY closed at 110.18 on Thursday.

So far, the medium-term trend is still up and the SPY is trading near its October high, which could be resistance turning into support. The Relative strength Index (RSI) finished at 50.24 and remains, for now, in the upward 40 to 50 support zone.

Don’t forget, seasonality remains bullish until yearend. A convincing support break through 108 would demonstrate enough selling pressure to make me reconsider my short-term still positive view on the S&P 500 and consequently the rest of the market.

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HansParisis
Yesterday, we saw Panama s $760 million bond offering fail, which caused the worst bond rout in nine months. In the evening, Nouriel Roubini, professor of economics and international business at New York University gave before the Council of the Americas in New York an...
Take,Profits,Emerging,Markets
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2009-19-18
Friday, 18 Dec 2009 08:19 AM
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