Company Description

AES provides energy to 29 countries with energy through generation and distribution. The company has diversified portfolio of thermal and renewable fuel sources.

EPS Rises

On Aug 7 the company announced quarterly earnings per share of 28 cents, 3 cents higher than last year and 8 cents higher than the Zacks Consensus Estimate.

All types of cash flow increased dramatically, including a $181 million jump in Consolidated Cash Flow, to $495 million.

Raising Guidance

During the same release the company raised full-year EPS guidance to between $1.05 and $1.10. The bottom and top end of the range rose 8 cents and 3 cents, respectively.

Solid Growth

Analyst estimates are coming in near the middle of the AES's forecasts, which would yield earnings growth of 9% this year. The Zacks Consensus Estimate is now $1.23, up 8 cents over the past quarter and projects a 13% growth next year.

Valuations

Shares are trading near 14 times forward earnings, a good value. Also, the PEG ratio is just under 1.0, meanings the growth rates are reasonably priced.

New Operations

AES announced the start of operations in 3 new plants in Chile, China, and Jordan. The total output for these locations is projected at 582 MW.

The Chart

Shares of AES made the most out of this year's rally that began in March. Recently they have encountered some resistance, but could have plenty of momentum going forward.

Zacks Investment Research

Based in Vancouver, Canada, Silver Wheaton is the world's only silver trading company. It does not own or operate mines but buys silver at below-market prices through long-term contracts with five major silver producers, including Goldcorp Inc. (GG), Lunding Mining, Hellas Gold and Glencore, and then reselling it to major industrial customers at a mark-up.

The deal gives Barrick funds for the construction of the Pascua-Lama mining project and significantly boosts the size of Silver Wheaton. Silver Wheaton has already made an initial payment of $212.5 million and will pay another $137.5 million annually for the next three years.

Barrick will receive $3.90 for each ounce of silver delivered under the agreement, which covers the life of the mining project, expected to be about 25 years. For Silver Wheaton, the deal will generate 9 million ounces of silver annually over the first 5 years at the Pascua-Lama mine, raising its output to 40 million ounces by 2013. Barrick expects production at Pascua-Lama in the range of 750,000 ounces to 800,000 ounces of gold and 35 million ounces of silver in the first 5 years.

Located on the Chile–Argentina border, Pascua-Lama is one of the richest deposits of precious metals in the world. It is expected to be one of the world's largest and lowest-cost gold mines and has one of the biggest global silver deposits. Barrick started the project in May this year.

Until Pascua-Lama begins production sometime in 2014, Silver Wheaton will receive 100% of silver produced from three other Barrick mines – the Lagunas Norte and Pierina mines in Peru and the Veladero mine in the south of Pascua-Lama in Argentina. 

Barrick will retain total control of gold production at all mines and 75% of the silver at Pascua-Lama. While the deal provides Barrick with a source for financing its Pascua-Lama project, it significantly expands Silver Wheaton’s reserves.

Company Description

RockTenn manufactures packaging products, bleached and recycled paperboard and merchandising displays. The company has over 200 facilities located in 26 states, Canada, Mexico, Chile and Argentina.

Analysts Bullish on Fiscal Fourth Quarter

The company recently exhibited some pricing power after saying in late July that the paperboard and container board pricing had stabilized in the prior weeks. On Aug 10 it announced a $40 per ton price increase on all grades of coated and uncoated recycled paperboard effective Sep 10.

Since the third quarter report in July, which saw the company report record earnings, the fourth quarter Zacks Consensus Estimate has jumped 40% to $1.19 from 85 cents.

The full-year 2009 Zacks Consensus Estimate climbed 88 cents to $4.61 per share in the last two months.

RockTenn is scheduled to report fiscal fourth quarter 2009 earnings on Nov 10.

RockTenn Posted Record Earnings Per Share in the Third Quarter

On July 27, RockTenn reported fiscal third quarter earnings that surprised on the Zacks Consensus Estimate by 61.80%. Earnings per share were $1.44 compared to the Zacks Consensus Estimate of 89 cents. This also easily bested last year's third quarter earnings of 70 cents.

Sales fell 8.7% to $703.9 million from $771 million in the third quarter of 2008.

However, the company saw improvement quarter over quarter as total tons shipped rose 5.7% compared to the second quarter. Consumer and corrugated packaging operations performed better than expected.

Value Fundamentals

RockTenn is a Zacks #1 Rank (strong buy) stock. The stock is attractively valued, with a forward P/E of 10.71. It is trading with a price-to-book ratio of 2.45.

The company also has a solid 5-year average return on equity (ROE) of 11.65%. As an added bonus, the company also pays a dividend with a current yield of 0.80%.

Zacks Investment Research

Based in Vancouver, Canada, Silver Wheaton is the world's only silver trading company. It does not own or operate mines, but buys silver at below-market prices through long-term contracts with five major silver producers including Goldcorp Inc. (GG), Lunding Mining, Hellas Gold and Glencore and then reselling it to major industrial customers at a markup.

Barrick will receive $3.90 for each ounce of silver delivered under the agreement, which covers the life of the mining project, expected to be about 25 years. For Silver Wheaton, the deal will generate 9 million ounces of silver annually over the first 5 years at the Pascua-Lama mine, which will raise the company's output to 40 million ounces by 2013. Barrick expects production at Pascua-Lama in the range of 750,000 ounces to 800,000 ounces of gold and 35 million ounces of silver in the first 5 years.

Located on the Chile–Argentina border, Pascua-Lama is one of the richest deposits of precious metals in the world. It is expected to be one of the world's largest and lowest-cost gold mines and has one of the biggest global silver deposits. Barrick started the project in May this year.

Until Pascua-Lama begins production sometime in 2014, Silver Wheaton will receive 100% of silver produced from three other Barrick mines – the Lagunas Norte and Pierina mines in Peru and the Veladero mine in the south of Pascua-Lama in Argentina. Barrick will retain 100% of the gold production at all mines and 75% of the silver at Pascua-Lama. While the deal provides Barrick with a source for financing its Pascua-Lama project, it significantly expands Silver Wheaton’s reserves.

Increase of Equity Offer

Separately, Barrick Gold raised its equity offering by $500 million. The Canadian gold mining company increased its offering to about $3.5 billion, or to 94.8 million shares, at $36.95 each, from a previous offering of $3 billion, or 81.2 million shares. The company also stated that the offering could surge to $4 billion if an overallotment is exercised.

Barrick plans to use $1.9 billion of proceeds to eliminate fixed priced gold contracts and $1.5 billion to eliminate a portion of its floating spot price contracts. It will record a third-quarter charge of $5.6 billion due to a change in accounting treatment for the contracts. We maintain our Neutral recommendation on the stock.

Domestic passenger traffic in Chile, Argentina, Peru and Ecuador rose 10.2% and international passenger traffic rose 2.1%. International capacity was mainly driven by a spike in operations to Europe and the South Pacific, which was partially offset by a decrease in certain regional routes.

Cargo traffic fell 4.2% mainly due to the slowdown in import and export markets in Latin America, partially offset by an increase in exports from Peru to the United States, as well as by an increase in operations to and from Europe after addition of two new B777F.

LAN’s near-term outlook is not as bright as it was few months ago primarily due to the international economic crisis. However, we believe Chile will perform reasonably during 2009.

In fact, the Chilean Government has already announced a $4 billion economic stimulus package that represents 2.8% of the country's GDP. The plan will be funded by the country's sovereign wealth fund. As the most organized and developed economy in Latin America, Chile is now capable of pursuing a truly anti-cyclical policy.

LAN accounts for more than one half of Chile’s international passenger traffic and nearly three-quarters of its domestic traffic. Moreover, consistent positive results and solid financial and liquidity positions will enable LAN to move ahead with a number of long-term initiatives.

We believe this is a very prudent strategy that the company adopted. Equifax will be able to get high quality engineering talent for a substantially lower cost, which will ultimately translate in to better result. The huge exchange rate difference between U.S. dollar and Chilean Peso more than justify the company’s decision. The recent interbank rate between the two currencies are 1 USD = 560.472 Chilean Peso. The exchange rate benefit that the company derives will ultimately improve its margins.

This apart, a brand like Equifax won’t face much difficulty in attracting high quality technical graduates. The company is also working with several universities of Chile to further modify the engineering curriculum so that it can meet industry demand. Chile is rapidly becoming a global outsourcing hub and around 4200 companies from 60 countries are operating in the region.

Equifax is well-positioned to benefit from its leadership in important markets, heightened consumer concern regarding identity theft, and strength in international markets. While Equifax’s core business remains solid, the company is driving growth through new product launches and international expansion. However, given the high correlation to consumer and financial markets, as well as the U.S. exposure, the impact of the recession on results is likely to continue. The benefit that the company derives from this new R&D facility might be partially offset by the negative impact of recession.

The Vancouver-based company had $278 million of cash in hand at the end of the second quarter. With the new credit agreement and no near-term refinancing requirements, Methanex has positioned itself well to meet its financial commitments and continue investing in projects that stimulate growth.

Methanex is the world's largest supplier of methanol to major international markets in North America, Asia-Pacific, Europe and Latin America, with about a 15% market share.

The chemical Methanol is a blend of 68% natural gas and 32% coal. Natural gas costs have been rising resulting in higher cost of producing methanol. In 2008, the company’s cash costs of producing methanol increased by $73 million due to higher natural gas costs.

Approximately 80% of all methanol output is used for production of formaldehyde, acetic acid and a variety of other chemicals, demand for which is influenced by the levels of global economic activity. These chemical derivatives are used in the manufacture of a wide range of products including plywood, particleboard, foams, resins and plastics.

The remainder of methanol demand largely stems from the energy sector for the production of methyl tertiary-butyl ether (MTBE) – a gasoline component – and as a direct fuel for motor vehicles. Use of methanol in manufacturing bio-diesel and dimethyl ether (DME) in power generation and other applications is also on the rise.

Methanex has embarked on a number of growth projects including the one on alternative natural gas sources in Chile. However, lower demand and pricing, as well as an increase in worldwide inventories of methanol due to the global economic crisis are negatively affecting the company. We maintain our neutral recommendation on the stock.

I should stress immediately that this is not a virtue but rather a vice, but I do think that exploring  conventional economic theory (and moving beyond?) is an important part of the process. In the end, the argument should be amendable to plain English and, as it were, plain common sense and intuition as well as, of course, empirical falsification. One thing which I can promise though is that there will be no mathematical models; at least there, I should have provided some comfort. If you want the math, you will have to wait for the thesis.

The best way to frame the following argument is perhaps to insert it in the chronology of the thesis where it appears, in the end, as a perspectivation on aggregate global capital flows. What precedes this is thus an, hopefully convincing, account of the fact that Germany and Japan are effectively dependent on exports to grow as a result of their demographic profiles.

Some Thoughts on Export Dependency

First it would be worthwhile taking a look at the following sketch (click to enlarge) which captures a lot of the issues that will be discussed below. Essentially, it attempts to show, as nastily and brutishly short as possible, what export dependency means in the context of what we could call conventional economic theory.

For non-econ wonks it is likely to be quite difficult to read, but in fact; it is fairly simple. The X-axis  represents the age of an economy here exemplified in the phases of the age transition derived from a study by Malmberg and Sommestad that discusses the demographic transition as a transition in age structure (and not population growth). But really, it could just as well be median age where a median age of 40-50 would the limit to the right and, let us say, about 20-25 to the left. The Y-axis is adopted directly from Higgins (1998,  e.g. table 1, p. 350) who uses empirical estimations to model the effect from age on, in this case, the current account. As I, Higgins also use age on the x-axis (age distributions) and on the y-axis he has age coefficients. This basically means that a negative value signifies that the age structure in the economy influences the current account negatively (i.e. pushing the CA towards a deficit) while the reverse is true for a positive value. Essentially, we need not, initially, bother with the numerical value of such age coefficients here, but merely note whether it is positive or negative and then secondarily we may look at the level effect (i.e. whether the effect is numerically large).

I should immediately point out that there are no direct empirical basis for the curves. The line which is labeled trajectory of export dependency is basically a cubed function designed to show a more less linear association between export dependency and ageing with the added and important feature (hence the cubed functional form) that export dependency tends to increase exponentially when you move into very old age. The blue line naturally do contain some empirical foundation in that it originates from an empirical study Higgins (1998) where it is constructed based on empirical estimations. I shall not go into Higgin's empirical framework here since it would take us into the dark world of time series econometrics but merely point out that Higgins manages to come up with what we could call the textbook representation of the effect of ageing on the current account and it is worth pointing out that he is not the only one. Also Supan et al. (2007), Bryant (2006), Henriksen (2002) and Summers et al. (1990) (among a myriad of other studies) postulate either through theoretical elaborations or empirical estimations a relationship which may be approximated by the chart above.

In theoretical terms, the basis for this "hump-shaped" relationship between ageing and the current account is derived in the context of the simple, yet crucial, intuition derived from Modigliani's life cycle hypothesis which states that consumers spend their working age years saving for retirement where they will dissave those accumulated assets. Then, at some point during working age there is a "peak" which is characterised by the time when the saving rate is highest and thus also, indirectly, where the effect on the current account should be largest. Following convention, this is modeled in economics through the idea of overlapping generations and often in the form of a neo-classical growth theory framework or simply a general equlibrium representative agent framework. I shall not open pandora's box and discuss the merit of these methods here but merely point out that I think it is very difficult to argue against the the basic intution which lies behind these models and thus, as it were, the intuition from the life cycle hypothesis.

In essence of course, the real issue is one of calibration and thus one of empirical analysis to see just how this postulated hump may materialise as well as of course realizing that ageing is not the only variable which influences the current account. It is also here that the fun begins and where things very quickly become very complicated. 

In this respect, it is worthwhile focusing the attention on the so-called dissaving phase which should be a natural result of the move towards an ever higher share of the elderly in the population. The basic mechanism here is simply that in standard economic models "old" economic agents will dissave their entire asset and thus as the old cohorts increasingly will outnumber the young cohorts the dissaving of the former will trumph the saving of the latter and lead to dissaving on an aggregate level. All sorts of ill prophecies have been proposed in the context of this dissaving hypothesis, not least that we are facing an asset meltdown scenario in 2050 because there will be far too many elderly wanting to offload their assets to a much smaller base of younger cohorts who cannot support a satisfactory price (yield) level.

Now, the problem here is that empirical studies have shown that the idea of dissaving, while intuitively strong, is difficult to verify to the extent that theoretical models suggest. This is not difficult to imagine I think. By very nature of the uncertainty of the mortality schedule people do not (cannot) dissave to 0 and beyond this there are may be bequest motives. In an open economy context this further creates the rather dubious situation in which economies well into their old age will have to run persistent external deficits because, presumably, savings will have decline far faster than domestic investment demands. I say dubious here because this is exactly where I have chosen to take my stab at trying to amend the theoretical framework.

Consequently, I am not so sure that this is a plausible end point in the context of continuing population ageing. Specifically, I would like to ask the simple question of whether it is actually optimal for any society to dissave as the theory postulates. I don't think it is and while it is certainly not unlikely that economies may actually dissave (defacto) they will still be dependent on exports to grow and thus the difference between the two curves into the latter age transitions represents an externality. This is also why I think that economies, in stead of responding with dissaving, will fight the point at which they reach this stage since when they do it is effectively game over. Imagine for example how the likes of Germany and Japan would ever be able to finance an external deficit brought about solely on the basis of the fact that savings has declined so fast as to not even be able to meet domestic investment demand which in itself will be declining. In this situation, wouldn't it be much smarter to maintain savings persistently higher than domestic investment demand which can of course only be materialized in an external surplus. I think it will and it is this point which you need to keep in mind as we move forward.

Implications for Global Capital Flows

With these considerations in mind, the key question then becomes; what happens when more and more economies grow to become increasingly like Germany and Japan? (As we know they will, at least in the context of the OECD). Naturally, not everyone can maintain excess exports over imports at the same time so something, as they say, has got to give and it is this something, as it were, which is the topic of this entry.

The focus on the implication of ageing on aggregate global capital flows is not new and is, in fact, an integral part of the analysis in Supan et al. (2007), Higgins (1998) and Bryant (2006) which were also mentioned above. However, in the following we are going to relax the condition of dissaving normally assumed in e.g. OLG models and accept that the propensity to run an external surplus will increase as an economy ages.

If we do this, it should not require too much imagination to see the issues that may rise. For starters, I want to reiterate yet again the trivial fact that not all economies can run an external surplus at one and the same time. This means, quite naturally, that what might be optimal from the point of view of a single economy (i.e. maintaining a surplus as it ages) may not be viable or optimal from the point of view of the global economy.

In order to frame the discussion it is natural to take our point of departure in the discourse on global macroeconomic imbalances.

As so many other things, the financial crisis has completely dislocated this system but it still worthwhile to ponder the nature of the global financial system in a post Asian crisis perspective and up until now. Consequently, the global macroeconomic landscape has long been characterized by what many has termed Bretton Woods II in which a large batch of especially Asian and oil exporting economies have been pegging their currencies to the US dollar who in turn have been running a large current account deficit to match the savings surplus in emerging markets such as China, South Korea, the Petroexporters, Brazil and Russia. In fact, if we cut a lateral line through this argument we could say that the world has hitherto been characterized by the Anglo-Saxon economies running external deficits to match surpluses in big emerging markets as well as Japan and Germany.[1] That however changed abruptly with the advent of the financial crisis and it is interesting to note the initial response by market participants and many scholars in their interpretation. Consequently, as it became clear that the US economy had been mortally wounded on the back of the subprime mortgage debacle the US Fed slashed nominal interest rates significantly. As a result the USD plummeted which led many commentators to hail the US economy’s fall from grace and specifically coined the notion of decoupling in which the Eurozone economy and Japan were pinned as the ones taking up the slack in steering forward global demand. Initial versions of the decoupling thesis thus centered on the shift in emerging market exports from the US to Japan and, especially, the Eurozone and thus in the process also a shift from the US dollar to the Euro as a global reserve currency. As it turned out this was nothing but a mirage masked by the fact that US policy makers essentially acted preemptively to a crisis which turned global during the summer 2007 and now most major central banks in the OECD have slowly bitten the bullet and followed Bernanke into quantitative easing to combat the risk of deflation which would be devastating in the context of the debt overhangs some economies face. Moreover, and as a general point, the global economy already decoupled from the US, and indeed OECD, economy a long time ago. Consequently, it is an irrefutable fact that the global economy is undergoing a fundamental change in which emerging economies such as India, Turkey, Brazil, China; Chile etc will ascend to account for an ever larger share of global GDP and growth. The crucial question is then; how will this process and the process of global ageing be transmitted to the global economy through capital flows?

As a starting point to answer this question I would like to draw the attention to comments made by two of the most prominent members of the global financial punditry in the form of US economist Paul Krugman (PK) and the Financial Times’ chief economics commentator Martin Wolf (MW).

Starting with the former[2] he recently pointed to the fact, in the context of Japan, that external demand was instrumental in ending the slump and providing a relative bounce between 2003 and 2007. As PK further goes to argue, this may present a rather ominous outlook since the extent to which we are all, in the OECD, currently stuck in a “Japan-style” liquidity trap the way out may constitute a rather crowded route. As PK poignantly points out at the end of his small piece;

(...) needless to say, we can’t all export ourselves out of a global slump. So, how does this end?

Krugman 2009

This is indeed a good question and MW makes a similar argument in a recent column[3] where he points towards the fact that the global imbalances themselves may prove to be an impediment to a swift global recovery.

 In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy.

Martin Wolf (2008)

This is of course a very appealing proposition and also goes to heart of idea that, at least, one part of the solution of the current global crisis lies in the resolution of global macroeconomic imbalances. But prey tell, how are these surplus countries going to revert towards a growth path characterized by a more balanced external account and perhaps even an external deficit?

It is in this context that the argument presented in this thesis becomes important. Consequently, there is a big risk that these surplus economies (e.g. Japan and Germany) simply will not be able to heed the call of MW. The main reason for this inability is then, in part, exactly to be found in the economic profile of a rapidly ageing economy with a median age pushing 40 year mark and beyond. Japan and Germany as well as the economies next in line to reach their age bracket cannot achieve growth based on domestic demand in a way which would allow them to suck up excess global capacity through an external deficit.

This is a very important point to stress in the context of the global economy and must be stressed with great emphasis.

Some Charts to Go With This

In order to try to make sense of all this consider the supply/demand chart below which plots the supply and demand for savings in the global economy. Following convention, the X-axis represents quantity and the Y-axis represents price. In this specific case, the X-axis can be seen as the total demand (from deficit nations) for excess investment beyond the level which can be achieved through domestic savings. The Y-axis then becomes the price[4] (interest rate) which equates this demand with the level (supply) of excess savings provided by the surplus nations beyond the level which can be absorbed by domestic investment demand

(click to enlarge)

As a natural consequence of the intuition underlying this small model, equilibrium is a forced (and always binding) condition since, by definition, the sum of external deficits must equal the sum of external surpluses in the global economy. 

If we accept the idea behind the theoretical framework presented in this thesis it is very easy to see the implications of a sustained global process of ageing. As is shown in the diagram the supply of excess savings (external surpluses) will increase with ageing [S(1) to S(2)]. But this is not the only effect. Following the simple intuition of a closed system an increase in supply must be meet by a decrease in demand too since we assume that economies are moving from a position as external deficit nations to a position of external surplus nations. In this sense, the constant level of output (quantity) is largely a simplifying trick in the sense that we let the entire adjustment process occur on the return of the excess savings of surplus nations rather than the quantity of excess widgets they can produce to sell abroad.[5] This produces an effect whereby ageing reduces the price of excess savings in equilibrium.

In order to move forward from here we need to mentally relax, as it were, the idea that deficits need to equal surpluses in equilibrium. In concrete terms, we need to understand the idea of equilibrium does not capture the notion of dependency on exports/foreign asset income to grow.

This is amended in the following graph; (click to enlarge).

The key here is the notion of the critical price level [6]. This should be seen as the level needed to sustain an acceptable level of growth in ageing economies and is thus a direct proxy for export dependency. As the global economy ages and assuming that equilibrium must hold at all times, the supply of excess savings and the demand for these savings decrease both lowering the equilibrium price and quantity. However, the critical price level remains. One key implications of this is a systematic oversupply of savings, or glut if you will, produced by the process of ageing and it is very important to understand that this oversupply is very tangible. It represents the value of external surpluses which would be enough for the likes of Germany, Japan etc to maintain a growth rate consistent with expectations and essentially the maintenance of their market economies. In the jargon of the theory, it represents the point at which ageing economies are optimally smoothing consumption and saving as a function of their intertemporal preference for the latter over the former. Of course, it cannot exist as a real entity but it may still have real implications.

The first obvious effect is to make the variation of ageing economies’ output very sensitive to the variation in out of deficit nations and thus global output. In its strictest form, this is how export dependency emerges. Another notable effect would be that it drives down the return in ageing economies to such an extent that it may fuel so called carry trade flows in which traders borrow in low interest rates currencies and invest in high interest rate currencies. Another example would be how these savings may be used to fund temporary and unsustainable build up of credit expansion in economies running external deficits. This is to say that if the equilibrium depicted above essentially is binding in the long run the implied existence of this excess pool of savings may lead to sudden outward jumps of the demand curve and thus the creation of credit bubbles. The main key to take away from this small economic model is thus the idea of an externality of ageing on a global level. This externality arises as a direct function of the implied existence of an excess of savings over demand as the global economy ages. In the context of the theoretical framework above the externality should be seen as function of the crowding of economies in one end of the spectrum on intertemporal preferences for consumption and saving. Crucially, it also means that what we might find to be optimal in the context of a single economy is not optimal on a global level a point which is certain to make standard economic modeling of aggregation from the representative economy level to the global economy very difficult. In empirical terms it means that what one might find to be the optimal path in a time series perspective of one economy may turn out to have radically different implications in the cross section when more or all global economies are involved.  

Further studies should attempt to develop this idea further since it provides a useful venue of analysis as an alternative to the traditional idea drafted from life cycle theory that global ageing will entail dis-saving on an aggregate level.

List of References

David M. Cutler & James M. Poterba & Louise M. Sheiner & Lawrence H. Summers (1990)
"An Aging Society: Opportunity or Challenge?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1990-1), pages 1-74.

Henriksen, Esben (2002) – A Demographic Explanation of U.S. and Japanese Current Account Behavior, Graduate School of Industrial Administration, Carnegie Mellon University

Higgins, Matthew (1998) – Demography, National Savings, and International Capital Flows, International Economic Review, Volume 39 (1998) Issue (Month): 2 (May) pp 343-69

  Borsch-Supan, Axel H; Alexander, Ludwig; and Krüger Dirk (2007) – Demographic Change, Relative Factor Prices, International Capital Flows and their Differential Effects on the Welfare of Generations, NBER Working Paper No W13185

[1] With the German surplus mainly materializing itself in an intra-European imbalance.

[2] Paul Krugman (2009) – The Eschatology of Lost Decades, NYT blog post

[3] Martin Wolf (2008) – Global Imbalances Threatens the Survival of Free Trade

[4] Which is assumed to be exogenously determined for all involved economies through the equilibrium in this system.

[5] Remember that I am assuming that quantity is fixed and that the entire adjustment takes place on the price. In a more realistic representation the adjustment would of course take place on both the price and quantity.

During late July, as requested by the FDA, Wyeth submitted additional information regarding the vaccine. Though the FDA was initially expected to respond by Sept 30, 2009, the agency has now pushed back the approval date by 90 days. The agency stated that it will need the extra time to review the additional information, which it considers to be a major amendment.

Prevnar is one of the world’s best selling vaccines. It treats illness caused by 7 strains of pneumococcal bacteria.  The vaccine recorded sales of about $2.7 billion in 2008, and we expect $2.9 billion of sales in 2009. In an effort to build on the success of Prevnar, Wyeth has developed the PV13 for infants and toddlers. The new vaccine will block 13 strains including the original 7. Earlier in July, PV13 received its first marketing approval from the regulators of Chile. The company is currently seeking approval for PV13 in about 50 countries.

It is estimated that PV13 would cover 92% of invasive pneumococcal disease, compared to 81% covered by Prevnar. Wyeth filed for EU approval of PV13 for pediatric use in December 2008. Meanwhile, GlaxoSmithKline (GSK) received European approval for its pediatric 10-valent vaccine, Synflorix (meant for children aged 6 weeks to 2 years), in March 2009, which will compete with Prevnar and PV13. However, GlaxoSmithKline does not have plans to launch the vaccine in the U.S.

Prevnar has witnessed solid sales growth over the past few quarters based on a number of reasons. Due to a recommendation from the Centers for Disease Control (CDC), compliance on a fourth dose for all healthy children under 24 months is over 80%.  Wyeth has been expanding Prevnar growth internationally through National Immunization Programs (NIP) with the governments of several countries.

We expect the list of countries to grow further as a result of the recommendations by the World Health Organization (WHO) to include Prevnar in these programs. We have a Neutral recommendation on the stock.

In a bubble, Day and Night

Is it Bust or is it Boom

That frames thy fearful asymmetry?*

 (click on pictures to enlarge)

Can you feel it? That calm and soothing feeling of low volatility and heaven bound risky assets driven by green shoots and second derivatives. Well, if you can't you are excused since neither can yours truly, or more precisely; he has a distinctly difficult time seeing from where people get the idea that we are headed for a broad based global recovery. However, beauty as always lies in the eye of the beholder and whichever way you look at it would be difficult to completely deny that the three key ingredients for a global recovery (and a resurgence of carry trade) in the form of low volatility, steadily climbing risky assets, and benign credit wholesale market credit conditions certainly seem to be present in ample quantities.

Now, while it is true that the level of volatility is still higher now than it was pre Q4-2008 and indeed pre August 2007 the trend so far this year has been inexorably down which reflects the perception that the worst may be over as well as the discourse of second derivatives and green shoots which has been with us throughout Q2 2009. With respect to equities they have equally begun to nudge up and are up some 5-10% from the beginning of the year in relation to Europe and the US. If you count from the trough reach some time during the first quarter this year, the increase would of course be bigger. The strength of the recovery discourse has taken many by surprise or perhaps more precisely, it has frustrated many. For example, I take note of the fact that two of the most astute macro traders (at least in my book) are feeling decidedly puzzled by the way the market is behaving at the moment. I cannot say that I blame them. For someone who take pride in being up to date in terms of macroeconomic data and analysis one would find it difficult to track the amount of bullishness which currently appear to have taken hold.

Now, I should immediately point out that I am not blind to the existence of the second derivative. I mean, I took calculus and I can also eyeball a graph in changes when I see one. My only gripe is that it only takes the faintest of scratch in the surface of the second derivative/green shoot glamour image to see that the fundamentals have not changed and moreover that the crisis has now moved its locus away from the US and right smack into the mainland of Europe in the form of significant downside risks in relation to Southern Europe and the ongoing mess in the CEE.

Yet, who is listening to a Danish student of economics anyway?

Consider consequently that the past couple of weeks brought us Bernanke's "exit talk" testimony to congress, news that a certain Mervyn residing at Threadneedle street would beat Bernanke to the exit, news that Russia is actually seriously considering issuing (and expecting foreign investors to bite) debt to cover its 2010 deficit, news that Hungary actually lowered interest rates despite, one could easily infer, an abyss of downside in the form of a plunging forint and a liability side denominated in Swiss francs, and finally Timmy's trip to China where it seems that the main message carried was one of reassurance that the US most certainly intend to vigilant towards the rising deficit.

We could add the Q2 GDP print in the US (preliminary) put up a much better figure, - 1% annualised, than expected which has so far been interpreted as a sign of recover although yet again I think that narrating this as a sign of an impending recovery is somewhat of a stretch. Meanwhile, Europe is heading straight for deflation and although I know that some economists, especially those of the old academic guard, consistently have been pointing to the benign effects of rigidness on the downside it is very important to remember that those same prices will need to adjust in key Eurozone countries absent a currency to bear some of the burden and thus price/wage rigidity may turn out to be a curse rather than a blessing.

Where is the Recovery?

The easiest way to approach this question is perhaps to point out where the recovery isn't and here I am talking about the OECD in general. Surely, we may succeed to avoid future cataclysmic events but the something has changed and new fundamentals are taking over. For example, I seriously doubt that many people have considered what it means for the global economy that the US economy will need to run an external surplus and I also think that most people have not yet realized the consequences of the unfolding mess in Europe and the Eurozone. On the other hand I have also stressed before how I am not, after all, a permabear in the sense that I do indeed see positive signs in emerging economies such as for example Brazil, India, Chile, Turkey, and China (although the latter is different for a number of reasons). I won't call this decoupling because evidently it isn't. To stay in the jargon I would rather call it re-coupling since this is essentially what it is and one key issue is the extent to which the new global economic system will help to even out the present imbalances and what consequences this, in some sense, inevitable rebalancing will have on surplus and deficit economies respectively. In this context and although one should always be careful in quoting onself, the following from an entry back in May still sums up quite well how I see the world at the moment;

We are very much still stuck in the mire and especially so in the context of the so-called developed OECD economies where it is difficult to see where any speedy recovery is going to come from. On the other hand the world is not made up entirely by the OECD edifice and it is exactly the potential for an asymmetric "recovery" and how global monetary policy might serve to transmit such a recovery which is the topic of this entry.

For the specifics of how I see the role of global monetary policy and global liquidity I recommend you to visit the actual post. However, it is worth noting that in a world where major global central banks are destined to keep rates low for an extended period it does not take much creativity to imagine the dynamics by which the global economy may potentially move forward driven by carry trade flows financed in the developed world seeking yield in whatever economies that might be able (and willing) to absorb the tide which is coming.

As I have stressed on several occasions it is exactly this reshuffling of the global economy on the back of the financial crisis which is at the heart of the matter. One obvious consequence is thus that the global economy, at one and the same time, increasingly will be populated by an increasing amount of economies with the need (and desire) to deleverage as well as an increasing amount of economies dependent on exports to achieve economic growth. In wonkish terms, global economies will tend to move towards the same intertemporal preference for consumption and saving and since global intertemporal smoothing, by definition, occurs through current account imbalances it is not difficult to see how there is a constraint on many economies’ ability to smooth their consumption and saving decisions optimally in the case of a process of crowding in one end of the spectrum.

An obvious question here becomes; who, if any, will be the economies tilting the scale in the other direction through their ability to provide capacity (return) for other nations' desire to save more?

How are things in Emerming Market Land then?

Personally, I have tended to put my focus elsewhere than China most prominently because I think that the old narrative of the BRIC economies taking over the helm is not an adequate way to look at it. Essentially, I would put Brazil and India one one side and Russia and China on the other side since in the case of the latter they are about to grow old much before they become the economies so many people expect to become. Apart from Brazil and India I also see a fairly wide batch of emerging economies with the potential to do the heavy lifting as we move forward and I would include here economies such as Chile, Indonesia, Turkey, Morroco and a number of others. Much more than quibbling about the actual candidates here I want to emphasise the importance in realizing how this global realignment won't take place with the emergence of one single economy taking over from the US, but rather with a "basket" of economies/currencies driving the realignment.

Having said all this, it is pretty difficult to get around the fact that everything seems to be revolving around China at the moment. More specifically fears are growing that in an effort the counter the global recession and in a world where 6-8% growth rates are, in general, difficult to come by Chinese authorities as well as foreign investors are fuelling a bubble in China which may look like the one currently unravelling in e.g. the Baltics look minuscule [quote from Bloomberg and the FT]. Thus and even though I would argue that the analysis should have a different fundamental focus it is still cast in the perspective of, first China and then the BRICs in general.

The BRIC nations, which also include India and Russia, have the four best performing stock markets in dollar terms this year among the world’s 20 biggest, according to data compiled by Bloomberg. China’s Shanghai Composite Index has soared 85 percent in dollars while Brazil’s Bovespa Index rose 77 percent. India’s Sensitive Index, or Sensex, climbed 61 percent and Russia’s RTS Index gained 60 percent. The Standard & Poor’s 500 Index in the U.S., by comparison, is up 8.4 percent while Japan’s Nikkei 225 Stock Average rose 7.5 percent.

Investor appetite for emerging-market assets is building on speculation that countries such as China and Brazil will be among the first to recover from the worst global recession since World War II, said Vinicius Silva, New York-based emerging markets strategist for Morgan Stanley. “It highlights the fact that demand for emerging-market assets remain strong and that companies, particularly in the BRIC markets, are using the improvements in capital markets to raise capital,” Silva said.

(FT)

Shares in Shanghai and Hong Kong tumbled on Wednesday as investors snapped up two newly listed mainland construction groups while selling down the rest of the market after reports that China’s central bank might rein in bank lending. Shares in China State Construction Engineering rose by as much as 90 per cent on their debut before closing 56 per cent stronger in Shanghai. China’s largest house-builder had last week raised Rmb50.2bn ($7.34bn) in the world’s biggest initial public offering since Visa raised $19bn in March 2008.

It is way beyond the scope of this post to open the box on what is really going on China. In terms of that topic I reserve the right to deal with it later and refer, thus far, to my styling on Blake above. However, I did like the recent analysis by Morgan Stanley's Qing Wang in which he talks about whether China is over-investing or over saving as well as the very relevant question of where the money would be spent were it not being used to finance the massive infrastructure investment program. Or, what is the opportunity cost of China's fixed asset investment program?

Given China's high national savings rate, from the perspective of the economy as a whole, there are only three forms in which China can deploy its savings: 1) onshore physical assets; 2) offshore physical assets; and 3) offshore financial assets. Since China maintains tight controls over outbound capital flows, about 70% of China's total offshore assets are in the form of official FX reserve assets as a result of investment made by a single-largest investor - the central bank. Moreover, we estimate that about 65-70% of China's official FX reserves are invested in US dollar assets, the bulk of which are US government bonds.

In response to this I ask the simple question. What is actually the capacity in China to create return on current and future investment of the magnitudes we are talking about both in the context of money supplied by domestic stimulus packages as well as foreign money thirsty for yield? Wang touches exactly upon this question as he questions just how much China can suck up. I would put it much more bluntly. China's capacity is declining and will continue to do so as we move forward as a result of the ageing which the one child policy is set to produce. This is really the missing story on China at the moment I feel and one story which could go a long way to differentiate the story. In this respect I do agree wholeheartedly with Michael Pettis when he says;

I have warned for a long time that it would be very difficult for China to make the necessary transition to a consumption-led economy quickly enough to accommodate the global adjustment taking place. Unless it is willing to see its economy collapse, there is simply no way China can reduce its negative net demand quickly enough to match the contraction in US demand and so avoid squeezing the hell out of the global tradable goods sectors. That is why policy coordination is so important, especially between China and the USD, and of course that is why I continue to be a pessimist. I do not think this policy coordination is taking place. I will write about this more later this week.

The only thing I would add is that this is not simply a question of correcting US-China imbalances, but a more more deep rooted issue in terms of fundamental drivers of international capital flows and the future supply of net capacity.

Moving on to safer ground I recently did a lengthy analysis on Chile in which I concluded that the economy was one of to watch for relative good news in relation to the financial crisis. Recently, we learned how Chilean banks booked a healthy US 959 million profit in the first half of 2009 and although this number is useless in itself I think that it is pretty obvious from digging into the specifics (see article) that although Chile financial sector has seen its share of losses, the picture is a lot less dire than elsewhere. In fact, if we look at one of graphs that I showed in my analysis of Chile, we see that financial services have held up remarkably well during the financial crisis (see also here), no doubt due to strong underlying fundamentals as well as a very aggressive policy reaction from the central bank. 

Generally, analysts and local observers in Chile are beginning to notice green shoots with increasing regularity and unlike the ones observed in Europe or elsewhere in the OECD I am more confident that the ones in Chile are going to be long lived although 2009, in all likelihood, will be a tough year when the chapter is closed. The following quote is from Bloomberg;

Chile’s economy may be starting to recover from its slump as extra government spending spurs growth, Finance Minister Andres Velasco said today. Velasco has spent more than $4 billion this year on tax cuts and extra outlays. He will pull $8 billion from Chile’s offshore savings funds in 2009 to help pay for the stimulus as well as to plug the budget deficit caused by slowing growth and lower receipts from mining.

Chile is facing the deepest recession since 1999 after revenue from exports declined and a virus ravaged its salmon farming industry. The economy shrank faster than forecast in the first half and probably contracted in the second quarter from the first, the central bank said on July 8.

“These policies have effects, but they don’t occur overnight, they don’t happen in one month or one quarter,” Velasco said. “We have to continue working, we have to keep a cool head and at the same time be prudently optimistic.”

Now, Velasco has a distinct interest, of course, in spinning the story in a certain way but until evidence surfaces to the contrary I am willing to buy this story. More generally, the influence of China also pops up in the context of copper prices where many suggest that a large part of the recent increase in Copper prices (and indeed commodities) owes itself exactly to the stimulus money from China. As a side note on this, it seems that the link between rising Copper (and commodities in general) is being increasingly linked to a story of stockpiling in China and then of course, what will happen when China decides that it has had enough. This was a story I picked up on in my analysis of Chile (picked off from Macro Man) and it appears to be gaining traction as an actual analytical explanation.

Elsewhere in Latin America, Morgan Stanley's Latam analyst on Brazil Marcelo Carvalho simply throws in the towel, as it were, devotes an entire note to the link between Brazil and China and what this means for the economic growth of the former. As will come as no surprise Carvalho notes the strong link between Brazil's economic performance and commodity prices and since China certainly seems to be driving the latter, if not directly, then through its effect on overall global sentiment then the rampant growth in China may add positively to the outlook in Brazil.

Moving the perspective up a further notch and as a concluding remark on my, admittedly, selective tour of the emerging market edifice I will leave you with the recent general statement from Morgan Stanley's Manoj Pradhan;

The strong worldwide rally in risky assets since March reflects not just the relief that the worst is likely behind us, but also anticipation of a return to growth for most economies. Much is expected from Emerging Markets, particularly from Asia ex-Japan, which is expected to outperform the rest of the world. Markets and investors realize, however, that not all EM economies are alike, and some will show output growth that is lower than the 1.3% growth our global team expects from the G10 economies in 2010.

Thanks for nothing might be your immediate response here and although I agree that this is extremely general it does sum up the main discourse at the moment whether you agree or not.

Bottomline - What to Watch?

The answer to this question depends on your perspective of course but it seems abundantly clear that if the locus of the financial and economic crisis has moved from the US to the shores of Europe and in particular Eastern and Southern Europe, the corresponding locus of the recovery has moved to Asia (ex-Japan) and most forcefully China. I think it is important to understand how and why these two discourses may co-exist as we move forward.

I believe it is obviously clear that the global economy is not heading for a quick rebound here, but it is equally as clear that some economies will be able to post growth rates that are much above the mean of what the OECD is able to. In this way, one key theme to watch is how this difference is transmitted through to the global economy e.g. in the form of carry trade flows but also in the form of an evolving process by which some economies begin, and go through, their inevitable adjustment and rebalancing phase.

In this specific context I have to be more than a little bit skeptical about the capabilities of China. This is not out of an inherent disdain towards the country but, on the contrary, because I fear that China may ultimately succumb to all those hopes and subsequent load pinned on her shoulders. In this sense I think, although I acknowledge that I have presented no formal analysis to back it up, that the recovery is some way to really materialize and that it may just ultimately be bust and not boom that frames China's economy.

---

* Apologies to William Blake; and of course to Macro Man for encroaching on his territory.

During the quarter, consolidated sales volume reached 99.7 million unit cases, up 3.7% from the year-ago quarter driven mainly by the Brazilian operation. Soft drinks increased 4.1% while juices, water and beer together remained stable. Net Sales amounted to US$301.3 million, down 3.6% in US dollar mainly due to currency-conversation losses.

EBITDA was down 1.4% while operating income was up 1.1%. Net income was down 32.9% to US$22.5 million. Quarterly EPADR reached US$0.18, down from US$0.26 in the year-ago period. Andina continues to keep a sound balance sheet with a net cash position of US$54.8 million at the end of June 30, 2009.

Despite a dominant position in Chile, Andina faces intense competition in Brazil and Argentina from major international companies such as AmBev (ABV), the largest brewer in Latin America which sells Pepsi products, local brands with flavors such as Guaraná and proprietary beers, Fomento Economic Mexicano (FMX), the largest Latin American beverage company by sales and low-cost beverages (or “B" brands).

The company also competes against other beverages such as water, fruit juice and sport drinks. Although the weak economic situation throughout the world is a source of concern, we are optimistic about Andina’s future as it makes low-cost, daily use products and focuses on domestic markets.

We are also encouraged by its strong presence in the Latin American soft drink business, which is one of the most attractive areas for industry driven by positive demographics.

We believe that the company’s geographic diversification, strong balance sheet and the nature of its product will help the company tide over the current economic crisis. We are reiterating our Buy rating on Embotelladora Andina.

How broad-based of an audience can an exchange-traded fund focused solely on companies based in Peru attract?

Since launching a little more than a month ago, the seemingly narrow-focused iShares MSCI All Peru Capped Index Fund (NYSEArca: EPU) has seen its assets top $33 million. That’s actually down a bit from a week ago when that number surpassed $35 million. (See related story here.)

So what’s driving such growth? Performance is one factor. In the past month, EPU’s returns have shot up by nearly 4 percentage points. More significantly to longer-term investors, the country has produced the best gross domestic product growth rate in the region—or near the top, depending on periods studied and data used—for more than a decade now.

And even more assets figure to start flowing EPU’s way. Shortly after coming out on June 22 (see related story here), iShares’ parent Barclays Global Investors announced that Peru’s pension fund manager has decided to invest some $300 million into the ETF over the next several months as a way to create more liquid and diversified portfolios for their investors.

It’s a theme that Daniel Gamba, BGI’s executive director of Latin American operations, says he’s seeing spread throughout the region.

IndexUniverse.com Editor Murray Coleman caught up with him at BGI’s headquarters in San Francisco on Thursday for a discussion of the growth of ETFs in Latin America. Below are excerpts from that conversation.

IU:  How much growth are you seeing in single-country Latin American ETFs?

Gamba: The asset base for EPU since it launched in June has been growing. It was actually seeded with about $1.2 million in assets. The markets have come down in the past few days a little, but the fact that it has been growing by about $2 million a day make us fairly optimistic. The expectation is that EPU will continue to grow at least at that pace in the future. And Peru is within the top two Latin American markets currently being recommended by U.S. analysts.

IU: In the U.S., a single-country ETF like EPU might seem like a niche product. But last year, Peru’s GDP grew at a 9% rate and it’s still Latin America’s fastest-growing economy, isn’t it?

Gamba: Yes, and we’ve seen strong relative growth in that country for several years. Between 2002 through 2008, its GDP growth averaged 6.8%. That was larger than Brazil or any other country in Latin America. And the inflation rate in Peru continues to be one of the lowest in the region.

IU: Do you see more pension managers in other countries investing in ETFs?

Gamba: In Latin America, pension plans are starting to use ETFs more these days. In Chile, pension plans have about $100 billion in assets, of which around $5 billion are invested through ETFs. Our market share represents roughly 80% of those pension ETF assets. In Mexico, the total pension system is about $100 billion, with ETF pension plan assets of around $7 billion. And Peru’s pension portfolios have close to $25 billion total assets, with about $1 billion in ETFs. As a whole, our ETF market share is about 80-90% throughout Latin America.

IU: How about Brazil?

Gamba: We just listed local ETFs in Brazil at the end of last year. We currently have about $1.5 billion in assets through the local exchange. But across Latin America, there’s a big trend of pension plans moving into ETFs as a more liquid way to diversify their existing portfolios.

IU: Isn’t the Latin American pension plan model being used in other parts of the world?

Gamba: Yes, and as a result, we’re seeing ETFs being embraced in regions such as eastern Europe. Those countries are using a similar type of pension system to the one in Chile. That’s also the case in Latin America, which has also closely followed the model pioneered in Chile.

IU: What similarities do these pension systems share?

Gamba: Basically, we’re talking about a shared view that pension systems should obligate employees to contribute at least a certain percentage of their salaries. Then a group of select pension fund managers handle those assets. It’s similar to the U.S. 401(k) system, except in Latin America and eastern Europe, contributions are mandatory. The ETF structure is being viewed as a favorite with regulators in both of those regions as a means to diversify and add more transparency into the pension systems.

IU: What do you expect for ETF growth rates in pension plans in the future?

Gamba: We expect pension plan assets in Latin America to grow at an average annual rate of around 15% over the next five years. The big majority of that growth will be driven by inflows from employees, who average 28-30 years of age across the region. And again, they’re obligated to contribute.

By contrast, in developed markets around the world, we’re seeing pension plans growing in single digits, less than 10% a year.

Chicago, IL – July 30, 2009 – Zacks.com announces the latest Industry Outlook. Today’s outlook from Zacks Equity Research analyst Ann Heffron discusses the Non-U.S. Banks sector. Highlighted stocks include: Itau Unibanco Holding S.A. (ITUB), Banco Santander Santiago (SAN) and HDFC Bank Limited (HDB).

Specific banks that we like include Itau Unibanco Holding S.A. (ITUB) in Brazil, Banco Santander Santiago (SAN) in Chile and HDFC Bank Limited (HDB) in India.

ITUB is the largest bank in Brazil following the February 2009 merger of Uniao de Bancos Brasileiros S.A. and Banco Itau Holding Financeira S.A., with R$575 billion (US$240 billion) in assets, 4,800 branches, and a 19% share of the Brazilian loan market.

SAN is the largest private bank in Chile (total assets of Ch$21,137 billion or US$33.6 billion at year-end 2008) and is 77% owned by Banco Santander Central Hispano, the largest bank in Spain and one of the largest in Europe.

HDB is now one of the largest banks in India, with Rs183,271 crores, or US $35.1 billion, and a retail network of 1,412 branches and 3,295 ATMs in 528 cities for the fiscal year ending March 31, 2009.

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That said, we believe that banks in stable emerging economies, such as Chile, Brazil or India, may be more attractive investments -- similar to what we expect for certain regional banks in the US. To be sure, banks in emerging economies will face asset quality issues; however, they are not confronted with other significant problems that many of the larger banks in Europe and the United Kingdom are, such as toxic securities, dilution from capital raising and dividend cuts/omissions. Moreover, these emerging market banks generally tend to be well capitalized, aren't as heavily exposed to the property markets, and have significant and generally growing sources of noninterest income.

In fact, Zacks-covered banks in Latin America and Asia have outperformed both the S&P 500 year to date, as well as Zacks-covered banks in Europe and the United Kingdom, increasing 40.1% and 27.7%, respectively, versus gains of 3.3% for the S&P 500 and 10.6% for banks in Europe and the United Kingdom.

There are several caveats one should consider when investing in these banks. First, investment in non-US ADR bank stocks entails foreign currency risk. Currently, the US$ is appreciating against many foreign currencies, which tends to depress US$ share performance. On the other hand, when this turns and the US$ starts falling against other foreign currencies, this will accelerate gains in US$. More importantly, we expect stock prices to continue volatile, reflecting economic uncertainty in the coming months and headline risk.

OPPORTUNITIES

Specific banks that we like include Itau Unibanco Holding S.A. (ITUB) in Brazil, Banco Santander Santiago (SAN) in Chile and HDFC Bank Limited (HDB) in India.

ITUB is the largest bank in Brazil following the February 2009 merger of Uniao de Bancos Brasileiros S.A. and Banco Itau Holding Financeira S.A., with R$575 billion (US$240 billion) in assets, 4,800 branches, and a 19% share of the Brazilian loan market.

SAN is the largest private bank in Chile (total assets of Ch$21,137 billion or US$33.6 billion at year-end 2008) and is 77% owned by Banco Santander Central Hispano, the largest bank in Spain and one of the largest in Europe.

HDB is now one of the largest banks in India, with Rs183,271 crores, or US $35.1 billion, and a retail network of 1,412 branches and 3,295 ATMs in 528 cities for the fiscal year ending March 31, 2009.

There are currently three stocks in the Zacks covered non-US bank universe with a Zacks ranking of 1 (Strong Buy) -- Credit Suisse Group (CS), HDFC Bank Limited and ICICI Bank Limited (IBN) -- and three stocks that have a Zacks rank of 2 (Buy) -- Itau Unibanco Holding S.A., Banco Bradesco S.A. (BBD) and Deutsche Bank AG (DB).

WEAKNESSES

We would avoid the larger banks in the Great Britain and Ireland, particularly those that that have participated in government recapitalization programs, such as The Royal Bank of Scotland Bank plc (RBS) and Lloyds Banking Group plc (LYG) in Britain and Allied Irish Banks (AIB) and The Governor and Company of the Bank of Ireland (IRE). In return for the government capital and asset quality protection, these banks must submit to other government intervention, including limits on dividend payouts and nomination of board members. This will limit their financial flexibility for awhile and raise issues of complete nationalization, which could continue to hurt share price performance.

Current Sells include Banco Bilbao Vizcaya Argentaria, S.A. (BBV) and Banco Santander Central Hispano, S.A. (STD), both headquartered in Spain. In Spain, the recent collapse in housing and construction, which propelled economic growth for the last decade, is expected to stall for the next few years. Moreover, the International Monetary Fund (IMF) believes that Spain will be harder-hit by the global economic downturn than other European countries. Indeed, Spain's unemployment rate was 17.4% at the end of March, more than double the level a year ago.

There is currently one stock in the Zacks covered non-US bank universe with a Zacks ranking of 5 (Strong Sell) -- Banco Bilbao Vizcaya Argentaria, S.A. -- and one stock that has a Zacks rank of 4 (Sell)-- Mitsubishi UFJ Financial Group, Inc. (MTU).Zacks Investment Research

That said, we believe that banks in stable emerging economies, such as Chile, Brazil or India, may be more attractive investments -- similar to what we expect for certain regional banks in the US. To be sure, banks in emerging economies will face asset quality issues; however, they are not confronted with other significant problems that many of the larger banks in Europe and the United Kingdom are, such as toxic securities, dilution from capital raising and dividend cuts/omissions. Moreover, these emerging market banks generally tend to be well capitalized, aren't as heavily exposed to the property markets, and have significant and generally growing sources of noninterest income.

In fact, Zacks-covered banks in Latin America and Asia have outperformed both the S&P 500 year to date, as well as Zacks-covered banks in Europe and the United Kingdom, increasing 40.1% and 27.7%, respectively, versus gains of 3.3% for the S&P 500 and 10.6% for banks in Europe and the United Kingdom.

There are several caveats one should consider when investing in these banks. First, investment in non-US ADR bank stocks entails foreign currency risk. Currently, the US$ is appreciating against many foreign currencies, which tends to depress US$ share performance. On the other hand, when this turns and the US$ starts falling against other foreign currencies, this will accelerate gains in US$. More importantly, we expect stock prices to continue volatile, reflecting economic uncertainty in the coming months and headline risk.

OPPORTUNITIES

Specific banks that we like include Itau Unibanco Holding S.A. (ITUB) in Brazil, Banco Santander Santiago (SAN) in Chile and HDFC Bank Limited (HDB) in India.

ITUB is the largest bank in Brazil following the February 2009 merger of Uniao de Bancos Brasileiros S.A. and Banco Itau Holding Financeira S.A., with R$575 billion (US$240 billion) in assets, 4,800 branches, and a 19% share of the Brazilian loan market.

SAN is the largest private bank in Chile (total assets of Ch$21,137 billion or US$33.6 billion at year-end 2008) and is 77% owned by Banco Santander Central Hispano, the largest bank in Spain and one of the largest in Europe.

HDB is now one of the largest banks in India, with Rs183,271 crores, or US $35.1 billion, and a retail network of 1,412 branches and 3,295 ATMs in 528 cities for the fiscal year ending March 31, 2009.

There are currently three stocks in the Zacks covered non-US bank universe with a Zacks ranking of 1 (Strong Buy) -- Credit Suisse Group (CS), HDFC Bank Limited and ICICI Bank Limited (IBN) -- and three stocks that have a Zacks rank of 2 (Buy) -- Itau Unibanco Holding S.A., Banco Bradesco S.A. (BBD) and Deutsche Bank AG (DB).

WEAKNESSES

We would avoid the larger banks in the Great Britain and Ireland, particularly those that that have participated in government recapitalization programs, such as The Royal Bank of Scotland Bank plc (RBS) and Lloyds Banking Group plc (LYG) in Britain and Allied Irish Banks (AIB) and The Governor and Company of the Bank of Ireland (IRE). In return for the government capital and asset quality protection, these banks must submit to other government intervention, including limits on dividend payouts and nomination of board members. This will limit their financial flexibility for awhile and raise issues of complete nationalization, which could continue to hurt share price performance.

Current Sells include Banco Bilbao Vizcaya Argentaria, S.A. (BBV) and Banco Santander Central Hispano, S.A. (STD), both headquartered in Spain. In Spain, the recent collapse in housing and construction, which propelled economic growth for the last decade, is expected to stall for the next few years. Moreover, the International Monetary Fund (IMF) believes that Spain will be harder-hit by the global economic downturn than other European countries. Indeed, Spain's unemployment rate was 17.4% at the end of March, more than double the level a year ago.

There is currently one stock in the Zacks covered non-US bank universe with a Zacks ranking of 5 (Strong Sell) -- Banco Bilbao Vizcaya Argentaria, S.A. -- and one stock that has a Zacks rank of 4 (Sell)-- Mitsubishi UFJ Financial Group, Inc. (MTU).Zacks Investment Research

Earlier in January, Kinross had stated that it expects to produce approximately 2.4 to 2.5 million ounces of gold in 2009, up 32% year over year. Cost of sales per ounce is expected to be around $390 to $420 for the full year.

Capital expenditures for 2009 are expected to be approximately $475 million. The company anticipates exploration and business development expenses at $75.0 million for 2009. General and administrative expenses are expected to be about $110.0 million in the year.

We remain cautious about Kinross’ near-term performance due to rising cash costs and falling production at some of its existing operations. The increased costs due to poor ore grades are attributable to declining production levels across operations such as, Musselwhite, Porcupine and Round Mountain.

Moreover, the company’s debt level has gone up significantly due to recent acquisitions, including the Canada-based gold producer Bema Gold Corp. and Aurelian Resources in South America. Although these acquisitions are likely to help long-term growth, Kinross remains vulnerable to integration risk.

The slowdown in the global economy, especially in the emerging markets such as India, could also weaken demand for gold. India absorbs about 50% of global gold production.

Recently, Kinross said that workers at its La Coipa mine have initiated a strike following an unsuccessful collective agreement negotiation. One of Kinross’s subsidiaries in Chile, Compania Minera Mantos de Ore, owns and operates this mine. The company stated that the strike would affect about 300 ounces of daily gold produced at the mine. The company is continuing negotiations with the employees.

We reiterate our Hold recommendation on the shares of Kinross, with a six-month target price of $17.00.

Chilean Airlines is also gaining some strength. During the week LAN Airlines S.A. (LFL), the main domestic and international passenger and cargo airline in Chile and one of the leading airlines in Latin America, announced a 9.3% increase in passenger traffic for the month of June 2009 due to the increase in capacity by 9.1%. LAN continued its expansion and renewal program by adding to its fleet through the Boeing Co. (BA).

International passenger traffic escalated by 3.7% and domestic passenger traffic rose by 25.9%. However, cargo traffic fell by 16.2% influenced by the global economic crisis. Second quarter 2009 seems to be very positive for LAN as passenger traffic grew in all the three months of the quarter.

Total passenger traffic in May rose by 11.4% of which domestic traffic increased by 30.2% and international traffic rose by 4.8%. In the month of April, passenger traffic rose 19.9%, with domestic traffic increasing 39.9% and international traffic growing 13.1%.

LAN accounts for approximately half of Chile's international passenger traffic and three quarters of its domestic traffic. We believe that consistent positive results and solid financial and liquidity positions will enable LAN to move ahead with a number of long-term initiatives. Thus, we rate the shares of LAN a Hold.

However, we believe that the economy is still experiencing tough times and will take some more time to get better.

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"Being a Keynesian means being a Keynesian in both the good and bad times."

Andres Velasco (Finance Minister in Chile) [1]

It has been a while since I last had a thorough look at Chile (here and here); more specifically, the last time I had Chile under the loop was in October 2008 and thus around the time when the global economy was about to enter two quarters (Q4-08 and Q1-09) of absolute horror. Whether we are past the worst at this point in time is debatable and I am, personally, skeptical with regards the narrative of second derivatives and green shoots, but it is hard to deny that it does represent a narrative and a fairly strong one too. In this context I thought it would be interesting to have a look at Chile, how it has faired and how we can expect it to fair in the immediate future.

It will immediately become clear as we move forward through the data that Chile is a bit unique both in a global and most definitely so in a Latin American context. In this sense, and if not for any other reason, the following should confirm that although the global economy is in the midst of the worst crisis since the 1930s, there are some economies who are better positioned than others. In order to pin down some fix points from which to begin this analysis, it is interesting to go back to Q4-2008 and the note by Morgan Stanley analyst Luis Arcantales who pointed out that as the global economy was about to slide, it was Chile's time to shine. This analysis was echoed in the Economist's small article about Chile in which it is argued that Chile is cashing in the fruits of rigour.

The question is then; is this true?The analysis which follows supports this positive view on Chile and I thought it would be fair, at the offset, to identify the two underlying mechanisms for this position.

First of all, Chile has been saving for a rainy day and especially in the context of the copper windfall enjoyed in the past years, Chile have been acting with utmost prudence. Coupled with a big pool of sovereign assets/wealth tucked away in main state investment vehicles (SWF) this provides Chile with an enviable and essentially remarkably positive fiscal profile going into the crisis. The most important aspect of this strategy of prudence has been the joint commitment across political leaderships to maintain a structural fiscal surplus of 0.5% of GDP in order avoid the copper windfall from pushing Chile into a variant of the Dutch disease as well as of course as to lock in savings for rainy day. Between 1996 and 2006, Chile’s public balance averaged 1.5% of GDP and coupled with a substantial amount of the copper windfall parked in the SWF Economic & Social Stabilization Fund (FEES) it has granted Chile with a net debt position of -11% (i.e. a net credit position of 11%).

In addition to the story about the timely management of the Copper windfall, I have also emphasised the demographics of Chileand in particular the fact that the key working age brackets are still growing as a percentage of total population. In many ways, Chile is now moving on the outskirts of the so-called demographic dividend with the age group 25-64 still growing as a percentage of total population whereas the age group 25-44 is declining. It is an empirical fact that such favorable demographic momentum has a strong effect on macroeconomic performance; see e.g. Bloom et. al 2007 and Bloom and Williamson 1998.

However, with fertility coming in at replacement levels in these very years Chile now stands on the boundaries of the much debated second demographic transition (SDT) and it will be interesting to see just how Chile enters this second leg of the demographic transition (if at all). It is important to point out that the SDT is far from an inevitable process, but in it the light of the regularity with which life expectancy has continued to increased at the same time as fertility has steadily moved below replacement levels in one country after another, it is difficult to imagine that Chile won't also enter a new stage in its demographic transition. However, and whatever happens in Chile as we move forward it does not change the fact that Chile has the demographic winds blowing firmly in the back at the moment even if the direction is changing. The key will naturally be the extent to which Chile manages what comes next in terms of demographic evolutions.

Touched, but not Harmed?

Even with this set of formidable fundamentals the global economic crisis has not left Chile untouched. On a quarterly basis the third quarter of 2008 marks the last quarter in which Chile grew at the rates its citizens and policy makers have been used to over the course of the years of abundance leading up to the crisis. Since Q3-2005 the average growth rate of Chile's output measured by GDP was a remarkable 4.5% q-o-q, a figure which clocked in at a puny 0.2% in Q4-2008 and then on to a full blown contraction of 2.1% q-o-q in Q1-2009. In fact on an annual basis, Chile has observed negative growth rates since Q3-2003.

The central bank expects GDP for 2009 to hover around the 0% mark with -0.75% as a low point and the 0.25% as the corresponding best case scenario. This relatively bleak figure is produced by the expectations that domestic demand will contract at a rate of 4.7% of which the expected decline in gross capital formation of of -14.3% which contrasts with a 19.5% expansion in 2008.

This headline forecast naturally calls for all kinds questions not least the impending question, as it is being asked around the world, about the extent to which Chile will ever recover to observe growth rates it did before the global crisis. Personally, I believe that most analysts would agree that the script on 2009 as a horrible year is already written and the question now becomes; will 2010 be the year of recovery or will it be the year of disappointment as the boost from 2009's stimulus packages wane and it becomes clear that any kind of second leg with respect to a sustained pickup in global growth will be very tepid. I tend to lean towards the latter account, but it is also clear that the extent to which the global economy is able to limp forward, it will be economies such as Chile who will be doing a lot of the heavy lifting.

This particular view motivates a lot of what follows.

A Closer Look at Trends in Output and Activity

One way in which to differentiate the GDP measures fielded above is to have a look at GDP divided onto sectors to see how ouput in Chile has evolved over a wide array of activities as well as to compare this to some form of base value. As can be seen from the graphs to the right; I have chosen to focus the attention on cobber, manufacturing, construction, housing property, and financial services.

In the graph to the right the base value 100 is equal to the mean value of output over 4 quarters in 2003 measured at constant 2003 prices. For an economist with an inclination to base his analysis on underlying demographic parameters one thing immediately stands out. Indices for construction and housing property have hardly budged. This is interesting since the main driving force across of the real economic collapse across the globe is, in the case of many other economies, precisely driven by a collapse in these sectors. Now, whether this is because Chile did not entertain the same kind of bubble-like environment as elsewhere or whether it represents the fact that Chile's demographic profile would exactly lead us to the point that these precise sectors should be well supported by the underlying fundamentals I will remain silent. Clearly, it will be a bit of both, but it is a point worth remembering when talking about construction booms and bubbles; there is always an underlying capacity story underneath. This discussion is readily available in an Indian version concerning the risk of overheating which was debated furiously a while back.

Meanwhile, the general trend indicates that although there has been a notable drop in the constant price value (in mill pesos, 2003 prices) activity has not collapsed in any sense of the word and remain well above its base value. Now, there has of course been a decline and the jury is still out with respect to the extent that the decline will continue, stabilise or turn into growth. Most likely growth will resume its due course over the course of h02-2009, but as in all other places in the world it is the level of this growth which may ultimately surprise on the downside. One area where activity has markedly declined since the middle of 2008 is in the context of manufacturing and in this sense it is worth while having a closer look at the underlying pattern here.

If we start by looking at the manufacturing indices in the first difference (change) and represented through a 6-month moving average to try to smooth out the trend for the naked eye we observe the negative trend as it has grapped hold in the latter parts of 2008 and into 2009. However, we also observe that this does not like the horrible charts that we have seen e.g. in the context of the US, Europe and Japan. The average monthly rate of change in the general index through the 12 months ending April 2009 was -0.2% which is not exactly cataclysmic; in terms of the subcomponent the production of durables on the other hand decline at an average rate of a full 2% (mom) whereas the average change in the value of capital goods was 1%.

During the time measured in the graph to the right the general index peaked in March 2008 at 139.7 and bottomed in February at 112.8 after which it has recovered to 123.1 at the end of April. As noted, a large part of the drop in the latter part of 2008 and into 2009 was a sharp decline in the value of production of durables which fell (on an index basis) to a low of 65.9 in February 09. At this point in time the production of durables furthermore remain depressed relative its long term trend. Conversely, the value of production of consumer goods and capital goods have pretty much shadowed the trend in the general index; or more aptly, it is the relative stability of these two indices which have helped the general index to skirt what has been a sharp decline in the production of durables.

Finally and perhaps to end where I should have started it is worthwhile to have a look at the main index for economic activity in Chile (the IMACEC).

Looking at this index it is difficult not to conclude that Chile appears to have managed the initial stages of the economic crisis quite well. Surely, the index is down as one would expect but at this point at least, it does not appear to be a decline which will buck the general trend. The index peaked in June 2008 and has since fallen back 5% at the end of April. The most recent data however confirm that the slowdown is lingering as we approached the second half of 2009 with industrial production dropping 10.5% yoy in May prompting comments from central bank president Jose De Gregorio to note that nominal interest rates could be lowered further from its already low level at 0.75%. Moreover, the monthly GDP indicator showed that Chile continued to contract as we entered Q2 posting yoy 4.6% decline and with monthly inflation rates beginning to post negative readings policy makers and analysts close to Chile remain alert. As we have just rapped up Q2 in real time it appears that Chile is poised to surprise somewhat on the downside in terms of prior expectations.

The External Sector

The analysis of Chile's external balance and the country's currency is of course closely tied to the evolution of international copper prices as Chile is, by far, the world's biggest producer and exporter of copper.

Although copper prices have fallen back somewhat in the midst of the global recession relative to the average values through 2006-2008 they are still higher than they were at the turn of the century when the price of copper were below 1 USD/lb. In fact, the graph should make any trader look more than once since with the recent increase the price of Copper is very close to breaching the its 12 month moving average price although of course the strength of the global momentum in general will decide whether commodities, and thus Copper, will fly again. As an aside, it would be very interesting to run an analysis on the extent to which the recent move upwards in Copper prices has anything to do with the reports that China is stocking up on commodities(it does of course, but how much?)

The positive effect from copper on Chile's external balance has, at times, been coined as the copper bonanza and Chile's ability to manage this bonanza in a prudent manner is one of the reasons that the country stand out in the current environment. In general however, the composition of Chile's external balance look very much like one would expect of course that the current account has been in surplus since 2004 due to the positive impact from the trade balance and thus net exports of copper. Thus, up until the advent of the financial crisis Chile's current account was characterised by a positive trade balance which outweighed a negative income balance to produce a consistent current account surplus. This changed in the latter part of 2008 where Chile posted a current account deficit in Q3 and Q4 as copper prices plummeted and exports in general fell. Basically, the trade balance withered away into a small deficit and with a continuing negative income balance, Chile found itself in need of external financing for the first time in 5 years. It also pushed the current account deficit into deficit for the full year 08 and the central bank, rather surprisingly, expects 2009 to see another CA deficit. I say surprisingly here since Q1-09 has so far posted an overall CA surplus worth 639 billion USD driven by a strong trade balance (mainly due to a plunge in imports and higher Copper prices). In any case, it is difficult to imagine that Chile will any problem financing a current account deficit of the magnitude the central bank is forecasting at 1.8% of GDP in 2009.

Turning the analysis to the currency it is interesting to observe that last time I looked at Chile inflation was running close to 10% and with nominal interest rates below the inflation rate the Chilean economy was experiencing negative real interest rates. In the context of the currency this meant that just as we were rounding up Q3 2008 the Chilean central bank decided to hold back on its frequent endeavors into the market to stem the rate of appreciation of the Peso against the USD. Endeavors, which by the way, have been unable to buck the overall trend in appreciation of the CLP ever since 2003 against the USD.

Of course, events had it in Q4 2008 that markets were to experience a significant amount of stress and rising volatility which sent the Peso down against the G3 currencies where it is only now recovering. In the context of the stress encountered in the market and seeing that the spread on Chile's sovereign debt increased less than the average in Latin America (and Asia) I argued that perhaps this was a sign that Chile's currency would not be hit as hard, in the context of increasing volatility, as its emerging market peers. My argument in a nutshell was that since the Peso was amongst one of the best performing emerging market currencies against the USD (back in April) this was perhaps due to the relatively high standing Chile had with international investors. Stefan Karlsson would have none of this however arguing in stead that the relative strength in the context of Chile's Peso was to be found in relation to the increase in the price of Copper. I conceded that Stefan was right in so far as goes the obvious fact that Copper is a very important driving force for the Chilean Peso regardless of whether investors were also targeting Chile as a relative safe haven amongst emerging markets.

However, in the spirit of good argument I decided to let me and Stefan's arguments suffer the, not always flattering, test of empirical validity. To that end I cooked up the following small model;

Y = a + b1X1+b2X2

Where Y is the exchange between the Peso and the USD (quoted directly), X1 is the price of Copper, and X2 is the sovereign spread. I use monthly data from Jan-00 to May-09 for a total of 112 observations and as per convention I am estimating this model in the first difference to avoid issues of stationarity [2]. Given the hypothesis one would expect a negative sign for X1 (i.e. an increase in the price of Copper is associated with an appreciation of the Peso) and a positive sign for X2 (i.e. an increase in sovereign spread is associated with a depreciation of the Peso). The estimation (with OLS) returns the following result;

Y = 0.0016 - 0.16X1 + 0.09X2 + ut [F = 33.25, R-sq = 0.38]

Now, both variables (X1 and X2) are significant at 1% [3] and thus I am inclined to stick my neck out a little bit more vis à vis Mr. Karlsson and conclude that the extent to which investors see Chile as a relative safe haven amongst emerging markets will in turn make Chile's sovereign debt spread increase less relative to its peers in relation to market turmoil which, in turn, has a measurable effect on the exchange rate.

Don't worry, this will be the first and last regression analysis you see in this note and just to sum up; Copper does matter for Chile and with net revenue expected to drop 69 percent this year to $1 billion from $3.2 billion in 2008, it will have a noticeable impact on Chile's economic performance although I need to emphasise that, to my mind, Chile posseses sound fundamentals which move far beyond the benevolence of its Copper ressources.

Employment

In terms of the labour market Chile cannot escape the fact that the crisis has taken its toll. The latest figure for April has the unemployment rate running at 9.6% which makes it almost certain that it is above 10% in the time of writing. 10% hardly constitute a dramatic number in a relative context (although of course it is big in an absolute sense), but given the fact that Chile entered the crisis running at 7-8% the lagged effect of the recession on the labour market may push the unemployment rate to uncomfortable levels which is sure to become a big topic for the elections later this year.

The number of persons employed peaked in August 2008 at 6.693.400 persons and has since declined to 6.574.500 persons for a total loss of employment of 118.900 people in April 2009. At the same time the registered number of persons in the labour force increased by 120.140 people from 7.196.110 to 7.316.250. These figures highlight one of the challenge with having a large and growing labour force in the sense that you need to maintain momentum in order to be able offer the jobs which the people rightfully demand.

Of course, a growing labour force is a good thing in itself, but in the current environment we should not rule out the case that it can become a source of "unrest" and fierce political debate. Should the employment situation continue to deteriorate on the margin (that is unemployment reaching some 15%) it will be very interesting to see how this drives the discourse in the upcoming elections.

Policy and Inflation

As noted, the last time I had Chile under the loop the central bank perceived the risks to economic stability in a wholly different light than it does now. At the time, inflation was running at some 10% on an annual basis and the central bank was busy moving up nominal interest rates. That has changed now.

Chile's central bank is formally targeting an inflation rate of 3% and just as it was running way above this target in the period leading up to the crisis, so has it plummeted accordingly and is currently running at negative values on a monthly basis. This has prompted the central bank to lower rates to an unprecedented level of 0.75% in June and most analysts expect another nudge downward come the July session (the graph to the right plots the interbank rate). If this turns out to be the case, the central bank will have lowered interest rates by 7.75 % over the course of the last 6 meetings. Just as it has been the case with other more prominent central banks, the Chilean derivative is trying to steer expectations in an environment where long term yields have begun to inch upwards to reflect the solidification of the second derivative discourse. In general, the central bank is tracking inflation closely with its target interest rate as can been in the graph to the right.

On the fiscal front Chile is in a much better position than most. Alongside the measures taken on the monetary front the government has, so far, initiated US $4 billion package of government spending and tax cuts. According to the budget office the budget deficit will amount to 4.1% of GDP this year, a position one finds it difficult to believe that Chile will have trouble financing. On June the 15th Chile's fiscal authorities announced a bond issuance worth $ 1.7 bn as well as its intent to use $4 bnfrom its offshore savings to fund spending.

Not too Shappy

All in all this does not look too bad now does it? In many ways I agree with CitiGroup's research department as they wrote in their latest overview of the Latin American economies;

We believe that the Chilean economy is one of the best positioned to capitalizefrom a global recovery. The openness of the Chilean economy made it one ofthe most vulnerable to the global slowdown, certainly after Mexico. But thestrength of its domestic fundamentals helped the economy withstand the globalshock.

Clearly, there are downside risks here and these come mainly from any adverse shocks Chile might suffer from another global fallout or simply the risk that global growth won't recover to the extent many are currently expecting. Yet, it is important to point out here that Chile's relative strength has two sides. On the one hand there is no doubt that the presence of Copper and the important of this commodity in the global value chain as well as the sound management of the windfall from this is very significant. On the other hand I have also, as per usual, emphasised demographics as a key variable and specifically that Chile is still riding the waves of the demographic dividend, or more aptly the afterburner of this process. In fact, what is important for Chile at this point is to lock in the favorable path by avoiding that fertility falls too much below replacement level. If Chile succeds in this, it may truly turn out to be an example to follow on more than one front. 

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[1] - I distinctly remember that he has been quoted for something like this, but I don't remember the exact wording. 

[2] - I use the following formula ln(t0/t-1).

[3] - If you run regressions as single linear models in turn with X1 and X2 respective as explanatory variables this pattern is repeated with almost identical R-sq values albeit somewhat higher for Copper prices.

I have added the piece below (with my emphasis) ...

Let me attempt, perhaps foolhardily, to map out a scenario of how the global economic crisis could evolve in continental Europe.

Even if we assume a recovery elsewhere, Europe’s economy may be stuck at low growth for some time. To understand why, it is perhaps best to look at sectoral balances for households, companies and the public sector.

The current account can be expressed as the difference between national savings and investments. Of the world’s 10 largest economies, the US, the UK and Spain used to run the largest current account deficits before the crisis. The US household sector has been shifting from a negative savings rate before the crisis to a positive rate of 4 per cent of disposable income now. The US corporate sector used to have a large negative savings rate, but this has almost disappeared. So far, the increase in net savings in the US private sector has been balanced by increased borrowing from the US government.

I am making three assumptions: the first is that the return to a positive US household savings rate is permanent – even under a scenario of a strong economic recovery. US households will take time to repair their balance sheets after the housing and credit disaster. Second, I also expect US companies not to return to the high level of borrowings that prevailed before the crisis. Third, I expect the US government to reduce its deficit after 2010. The recent rise in long-term bond yields should serve as a reminder that deficits cannot go on rising forever.

Taking all three factors together, the US will shift from a strongly negative current account balance towards neutrality, perhaps even a small surplus for a short period. I expect similar shifts in the UK and Spain at different magnitudes.

Among countries with large current account surpluses, the three biggest are China, Japan and Germany. I am focusing on Germany here. The German household sector will maintain its high savings rate. The German government increased its deficit during the crisis, but is now looking for a quick fiscal exit strategy. The Bundestag has recently voted through a constitutional balanced-budget clause, which requires cuts in the deficit almost right away. Japan will probably maintain its larger fiscal deficit for longer, but if we take Germany, China and Japan together, we will not see a sufficient and sustained fiscal expansion to compensate for the sectoral shifts elsewhere.

Global current account surpluses and deficits add up to zero. So if everybody is saving more, who will be dissaving? It will have to be the corporate sector in the countries with large net exports. So if the US, the UK and Spain are heading for a more balanced current account in the future, so will the surplus countries.

The current account balance can also be expressed as the sum of the trade balance, net earnings on foreign assets, and unilateral financial transfers. In several countries, including the US and Germany, the gap between exports and imports serves as a good proxy for the current account. A fall in the trade deficit in the US, UK and Spain implies a fall in the combined trade surplus elsewhere. And as some of the shifts in the US and the UK are likely to be structural, this will have long-term effects on others. In particular, it means the export model on which Germany, China and Japan rely, could suffer a cardiac arrest.

What about the argument that a large part of German exports goes to the rest of the eurozone? This is true, but there are imbalances within the eurozone too. Spain has been running a current account deficit of close to 10 per cent of gross domestic product. As that comes down, so will Germany’s equally unsustainable intra-eurozone surplus.

Through what mechanism will this export-sector meltdown come about? My guess is that in Europe it will happen through a violent increase in the euro’s exchange rate against the US dollar, and possibly the pound and other free-floating currencies.

Exchange rate devaluation would greatly help the US and others to reduce their current account deficits, but it will impair the economic recovery in countries with large trade surpluses and free-floating exchange rates. Last week’s remarks by Angela Merkel, who criticised the Federal Reserve and other central banks for running inflationary policies, sharpened investor perceptions of transatlantic policy divergence and decoupling. Many investors are now starting to bet on a strong appreciation of the euro – the last thing Ms Merkel wants.

Neither Germany nor Japan is politically equipped to deal with an exchange rate shock. China may continue to manage its exchange rate, but the Europeans are much less likely to intervene in foreign exchange markets. For the time being, the governments of the classic export nations cling on to their export-based economic model, the model they know best. Their only strategy, if you call it that, is to hope for a miraculous bail-out from the US consumer – which is not going to happen this time.

If my predictions prove correct, Germany will be down and out for a long time with a huge and still unresolved banking crisis, an overshooting exchange rate and lower net exports, presided over by politicians who panic about domestic inflation. This will not end well.

Really, what people need to think about here is the important of deleveraging on a macroeconomic level and what this will mean for aggregate global demand. As I have pointed out before, emerging markets such as Brazil, Turkey, India, Chile, etc are coming (and fast too), but will they be able to provide enough capacity of to suck up the massive increase in desired savings we are going to observe? Well, this is of course only one of the questions here and what we really need is a sound theoretical framework to explain all this and as you might have guessed by now it is crucial that we allow demographics to enter the equation as a driving force for the propensity (desire) to run an external surplus and thus to maintain excess savings vis-à-vis the rest of the world.

If you add the effects of the continuing demographic shifts to the obvious need for economies such as the UK, the US, etc to correct (regardless of underlying demographis) you end up with a problem and specifically a problem of excess saving relative to the willingness and ability to absorb these savings through aggregate demand or if you will productive investment. In terms of (wonkish) economic theory we can think about ageing on a macroeconomic level as the crowding towards one end of the intertemporal spectrum of consumption and saving. Consequently, one can expect (and show) why ageing economies, in stead of simply accepting the inevitable decline through dissaving, will have an intertemporal preference to push forward dissaving (consumption) relative to maintaining a surplus on their external accounts as a cushion againts dissaving. 

I will have much more on the theoretical front here as we move forward.

In another reduction of alternative indexes that use different valuations and business fundamentals to weight companies, Claymore Advisors is seeking to switch an existing exchange-traded fund to a more traditional market-cap size weighted benchmark.

But that isn't all.

In a filing dated May 21, the trust for the Claymore/Great Companies Large-Cap Growth ETF (NYSE: XGC) is asking the Securities & Exchange Commission to let it invest in much smaller companies. And while listed largely on U.S. exchanges, they'd be foreign-based businesses.

The new fund would be called the Claymore/BNY Mellon International Small Cap ETF.

The document notes that the new ETF's "investment objective is not fundamental" in nature. It clearly states the change will revert to a strictly passive indexing approach. (See filing here.)

The request to regulators by Claymore comes on the heels of PowerShares' decision to close 19 of its ETFs, a dozen of which were based on fundamental indexes created by Rob Arnott's Research Affiliates. (See related story here.)

While the existing XGC also follows an index, it's based on an investment approach by Great Companies Inc., a Tampa Bay, Fla.-based money management firm. Its managers rank companies by such factors as price-earnings growth rates, or PEG ratios, and various debt measures for assessing profitability.

Great Companies uses computers to crunch fundamental data to compare value characteristics against growth metrics for domestic large-cap names. Stocks are ranked and added to the ETF's underlying index according to the adviser's composite scoring system.

When it was launched in April 2007, XGC came with an expense ratio of 0.60%. It hasn't changed since then and it had slightly more than $3.7 million in assets through Tuesday.

Higher Price Tag 

When it was first coming to market, a Great Companies' portfolio manager acknowledged that XGC's price tag was higher than rival large-cap funds such as Vanguard and iShares. "But we're providing more of a managed-account product than a classic index-fund product," he said in a MarketWatch.com story at the time. (You can read the story here).

The new small-cap international ETF would face stiff competition as several newcomers have jumped into the asset class in the past few years. But one bone of contention for U.S.-based investors in often illiquid foreign waters is that it can be difficult to follow small-cap names held by their funds.

The new Claymore offering would address that concern by predominately investing in overseas firms with listings on major U.S. exchanges. The fund would hold mainly companies with American depositary receipts or global depositary receipts and market caps of $250 million to $2 billion.

At the end of March, such a makeup gave the underlying index a definite slant to emerging markets. The BNY/Mellon benchmark consisted of 92 stocks. The weightings by country then were: Brazil 21.37%; China 19.20%; India 7.28%; United Kingdom 6.88%; Chile 5.59%; Mexico 4.19%; Russia 3.64%; Japan 3.40%; Israel 3.10%; Netherlands 2.78%; Greece 2.64%; South Africa 2.57%; Italy 2.14%; Argentina 1.98%; Switzerland 1.96%; France 1.89%; Korea 1.79%; Australia 1.68%; Ireland 1.61%; Colombia 1.51%; Hungary 1.00%; U.S. 0.82%; Indonesia 0.50%; Hong Kong 0.46%; Denmark 0.45% and Germany 0.41%.

No expense ratio is listed in the filing. But if the new fund were in the same neighborhood as XGC's, it would seem to have a better fighting chance when competing in the small-cap international arena.

Prices for rival ETFs range from around 0.40% and up. For example, the group's granddaddy is the WisdomTree International SmallCap Dividend Fund (NYSE: DLS). Meanwhile, Vanguard entered the field in March with an ETF charging 0.38%. (For a more complete breakdown on competing international small-cap ETFs, see stories here and here.)

-- This report was submitted by IndexUniverse.com's Murray Coleman. 

The growth in emerging markets can now be played by country-specific exchange-traded funds as well as broad-based stock portfolios.

But on Thursday, another option became available to investors. The first family of ETFs offering exposure to sectors within emerging markets was launched by New York-based Emerging Global Advisors.

• EGS Emerging Markets Energy Fund (NYSE Arca: EEO). It tracks an index of the 30 largest emerging markets companies in the oil and gas industry across 13 countries.
• EGS Emerging Markets Metals & Mining Fund (NYSE Arca: EMT). It includes 30 of the biggest emerging market companies in the metals and mining sectors across nine countries.

As first-movers in the market, the two new emerging markets sector ETFs are setting the cost bar for such a niche at an expense ratio of 0.85% apiece. But Holderith described the new sector ETFs as trading vehicles that would particularly open new avenues for institutional investors.

Despite the relatively high price tag, that might be enticing for hedge fund managers and other investment groups trying to shift large amounts across various emerging markets.

Richard Kang, who serves as the firm's director of research, noted that developing markets can run into rather severe liquidity problems at times. He pointed to the fact that stock exchanges in several emerging countries have been forced to completely shut down. That was the case in Russia during much of the worst of the global financial crisis, among others.

By taking a sector perspective across several different markets, he believes that traders will be able to cushion their exposure to such liquidity problems and diversify their portfolios in different ways. "The Emerging Global Shares ETFs are designed to give investors the ability to execute active investment management strategies in markets where the liquidity to trade is not always available," said Kang in a statement.

Consequently and although I am lukewarm about the idea of green shoots and second derivatives, I am more positive about the narrative presented by BlackRock Inc's Bob Doll when he points to the potential in emerging markets;

Emerging-market stocks may gain an average of 20 percent this year as they rebound faster and stronger than their peers in developed countries, said Bob Doll, vice chairman and chief investment officer for BlackRock Inc. The global economy has probably seen its worst in the past two quarters, with developing nations already starting to emerge from the recession, Doll told reporters in Singapore today.

“If in fact we have seen a bottom in markets and economies are going to recover, the emerging parts of the world will recover the most and the fastest,” Doll said. “After all, their recessions were largely unwanted inventory build-up and not the credit bust in the Western world.” The MSCI Emerging Markets Index has already gained 25 percent this year, with developing countries making up all 10 of the world’s best performers. That’s outpaced the 2.3 percent retreat in the Standard & Poor’s 500 Index.

Now, when it comes to the actual headline number presented, I would assume, for the media I won't venture an opinion. However, the general idea that emerging markets such as India, Brazil and Turkey are among those economies where growth conditions are, relatively, most favorable I am very much in agreement with. Clearly, this is not going to be one way street and as we learned from parsing the data from e.g. Mexico and Argentina it indicate how the swine flu may just have tipped over the economy in the case of the former whereas the latter also looks set to enter an actual recession. However, there are positive signs too, not least in the context of India which Edward recently put under the loop and concluded that conditions might just favor India to rise well above the rest of its peers. After looking at the data myself and from reading this, I am very much inclined to agree. So yes, I do think that emerging markets are going to fly; some of it will be based on real fundamentals and some of it will be the carry trade since in a world where some of the biggest central banks are commited to low nominal interest rates the environment for carry trades are perfect if and when volatility stays down. Just witness Deutche Bank's recommendation that investors sell Euros to buy into the Ruble and Forint (who are these people?!). Astute investors will thus always remember the story of Icarus, but the underlying current is still important here.

Apart from this I want to emphasise two points.

First I think that the points above underpin the general idea that whatever global economy which will emerge in the wake of the current crisis, it will one in which the sources of global demand, yield, and capacity will be more diverse than before. This is of course the positive spin to the fundamental question of who and where global demand will come in the future, not least to satisfy the excess savings which will emerge as more economies become dependent on exports to grow.

Secondly, I want to touch briefly on a related topic which has been dominating the debate on an on-off basis lately. Specifically, I am talking about the prospect of the Chinese Yuan as the future global reserve currency (surpassing the USD) which was given new life recently in the form of a NYT op-ed by Nouriel Roubini in which the (self)-proclaimed economic oracle predicts that we are now entering an Asian century with China as the dominating the economic power. Stefan Karlsson also moves in to steal some of Mr. Roubini's thunder dryly noting that the idea of the Yuan as global reserve currency is not new as he himself predicted it four years ago. Finally, there is Jeffrey Sachs (hat tip: Mark Thoma) who also muses on the prospect of a more diversified global monetary system with the Yuan in a dominant role. 

It is always customary to begin with the points you agree with and let me be very clear here. The days of unilaterally sponsored demand by the US and the subsequent role of the USD is over. There is just no way in which the US can rise to command the same role in the global economy as it did before the subprime crisis hailed the initial fall from grace. However, the idea that China alone will rise from the ashes of this crisis to take over from the US is a fallacy. 

In essence and all the technical issues aside of whether China will choose to issue debt denominated in RMB, whether the focus of trade credits and transactions in general will move towards a favor of RMB etc, any one candidate for reserve currency status would clearly need an open capital account and almost surely, in the present context, the stomach to run a current account deficit. So let us chew on this a bit. If China become the sole economy to "take over" from the US it would mean that China should run a rather substantial external deficit. 

Basically, there are many aspects of being a reserve currency but one surely is the ability to be a net debtor nation. It goes with the territory I would say and especially in whatever "new" global edifice we will be looking at. I think this is what Roubini is missing even if his other points of a more structural and institutional nature are true; clearly China is a force to be reckoned with, but then notice this;

China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth.

You can almost smell the carry trade and yield here. There sure looks to be a healthy cake to chew on here, but the thing is that the astute commenters above are not thinking about the fact that within the next decades China will age at an unprecedented speed (perhaps even faster than Japan!). Now, I am not sure whether or not this demographics stuff has trickled down yet but in this context it is important. Clearly, there will be growth in China and she will ascend to command a larger role, but if she opens the capital account we will have the world's biggest firework and a huge version of Latvia. I am  sorry, but if you don't factor in the demographics here you are getting nowhere.

Consequently, I think that Bretton Woods III is a lame duck in so far as it is made up of one currency to take over the USD; there is just no ONE economy out able to shoulder the load. This is what has changed now, the US (or Anglo-Saxons if you will) cannot carry us anymore. Rather I imagine that it will be a basket and although China will be an important part of that basket we also need to look at India, Brazil, Turkey, Chile and a number of other economies. If the discourse solidifies towards China as the economy to single handedly pull the global economy and stage a process of rebalancing it won't be pretty once markets start to factor in the demographic fundamentals in China.

Chicago, IL - May 13, 2009 - Zacks.com announces the latest Industry Outlook. Today's outlook from Zacks Equity Research analyst Ann Heffron discusses the Non-U.S. Banks sector. Highlighted stocks include: Itau Unibanco Banco Multiplo S.A. (ITU), Banco Santander Santiago (SAN) and HDFC Bank Limited (HDB).

Here is the latest on the Non-U.S. Banks sector:

Specific banks that could outperform include Itau Unibanco Banco Multiplo S.A. (ITU) in Brazil, Banco Santander Santiago (SAN) in Chile, and HDFC Bank Limited (HDB) in India.

ITU is the largest bank in Brazil, following the February 2009 merger of Uniao de Bancos Brasileiros S.A. and Banco Itau Holding Financeira S.A. (or Itau), with R$575 billion (US$240 billion) in assets, 4,800 branches, and a 19% share of the Brazilian loan market.

SAN is the largest private bank in Chile (total assets of Ch$21,137 billion or US$33.6 billion at yearend 2008) and is 77% owned by Banco Santander Central Hispano, the largest bank in Spain and one of the largest in Europe.

HDB is now one of the largest banks in India, with Rs183,271 crores, or US $35.1 billion, and a retail network of 1,412 branches and 3,295 ATMs in 528 cities for the fiscal year ending March 31, 2009.

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Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=4581. 

Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release. 

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security. 

Contact:Mark VickeryWeb Content Editor312-265-9380Visit: www.zacks.com

That said, we believe that banks in stable emerging economies, such as Chile, Brazil or India, may be more attractive investments, similar to what we expect for certain regional banks in the US. To be sure, banks in emerging economies will face asset quality issues; however, they are not confronted with other significant problems that many of the larger banks in Europe and the United Kingdom are, such as toxic securities, dilution from capital raising, and dividend cuts/omissions. Moreover, these emerging market banks generally tend to be well capitalized, aren't as heavily exposed to the property markets, and have significant and generally growing sources of noninterest income.

In fact, Zacks-covered banks in Latin America and Asia have outperformed the S&P 500 year-to-date, increasing 19.2% and 10.0%, respectively, versus a 0.7% gain in the S&P 500, and compare to a 2.0% decline for Zacks-covered banks in Europe and the United Kingdom.

There are several caveats one should consider when investing in these banks. First, investment in non-US ADR bank stocks entails foreign currency risk. Currently, the US$ is appreciating against many foreign currencies, which tends to depress US$ share performance. On the other hand, when this turns and the US$ starts falling against other foreign currencies, this will accelerate gains in US$. More importantly, we expect stock prices will continue to be volatile, reflecting economic uncertainty and headline risk in the coming months.

OPPORTUNITIES

Specific banks that could outperform include Itau Unibanco Banco Multiplo S.A. (ITU) in Brazil, Banco Santander Santiago (SAN) in Chile, and HDFC Bank Limited (HDB) in India.

ITU is the largest bank in Brazil, following the February 2009 merger of Uniao de Bancos Brasileiros S.A. and Banco Itau Holding Financeira S.A. (or Itau), with R$575 billion (US$240 billion) in assets, 4,800 branches, and a 19% share of the Brazilian loan market.

SAN is the largest private bank in Chile (total assets of Ch$21,137 billion or US$33.6 billion at yearend 2008) and is 77% owned by Banco Santander Central Hispano, the largest bank in Spain and one of the largest in Europe.

HDB is now one of the largest banks in India, with Rs183,271 crores, or US $35.1 billion, and a retail network of 1,412 branches and 3,295 ATMs in 528 cities for the fiscal year ending March 31, 2009.

WEAKNESSES

We would avoid the larger banks in the Great Britain and Ireland, particularly those that that have participated in government recapitalization programs, such as The Royal Bank of Scotland Bank plc (RBS) and Lloyds Banking Group plc (LYG) in Britain and Allied Irish Banks (AIB) and The Governor and Company of the Bank of Ireland (IRE).

In return for the government capital and asset quality protection, these banks must submit to other government intervention, including limits on dividend payouts and nomination of board members. This will limit their financial flexibility for awhile and raises issues of complete nationalization, which could continue to hurt share price performance.

Current Sells include Banco Bilbao Vizcaya Argentaria, S.A. (BBV) and Banco Santander Central Hispano, S.A. (STD), both headquartered in Spain. In Spain, the recent collapse in housing and construction, which propelled economic growth for the last decade, is expected to stall for the next few years. Moreover, the International Monetary Fund (IMF) believes that Spain will be harder-hit by the global economic downturn than other European countries. Indeed, Spain's unemployment rate was 17.4% at the end of March, more than double the level a year ago. Zacks Investment Research

That said, we believe that banks in stable emerging economies, such as Chile, Brazil or India, may be more attractive investments, similar to what we expect for certain regional banks in the US. To be sure, banks in emerging economies will face asset quality issues; however, they are not confronted with other significant problems that many of the larger banks in Europe and the United Kingdom are, such as toxic securities, dilution from capital raising, and dividend cuts/omissions. Moreover, these emerging market banks generally tend to be well capitalized, aren't as heavily exposed to the property markets, and have significant and generally growing sources of noninterest income.

In fact, Zacks-covered banks in Latin America and Asia have outperformed the S&P 500 year-to-date, increasing 19.2% and 10.0%, respectively, versus a 0.7% gain in the S&P 500, and compare to a 2.0% decline for Zacks-covered banks in Europe and the United Kingdom.

There are several caveats one should consider when investing in these banks. First, investment in non-US ADR bank stocks entails foreign currency risk. Currently, the US$ is appreciating against many foreign currencies, which tends to depress US$ share performance. On the other hand, when this turns and the US$ starts falling against other foreign currencies, this will accelerate gains in US$. More importantly, we expect stock prices will continue to be volatile, reflecting economic uncertainty and headline risk in the coming months.

OPPORTUNITIES

Specific banks that could outperform include Itau Unibanco Banco Multiplo S.A. (ITU) in Brazil, Banco Santander Santiago (SAN) in Chile, and HDFC Bank Limited (HDB) in India.

ITU is the largest bank in Brazil, following the February 2009 merger of Uniao de Bancos Brasileiros S.A. and Banco Itau Holding Financeira S.A. (or Itau), with R$575 billion (US$240 billion) in assets, 4,800 branches, and a 19% share of the Brazilian loan market.

SAN is the largest private bank in Chile (total assets of Ch$21,137 billion or US$33.6 billion at yearend 2008) and is 77% owned by Banco Santander Central Hispano, the largest bank in Spain and one of the largest in Europe.

HDB is now one of the largest banks in India, with Rs183,271 crores, or US $35.1 billion, and a retail network of 1,412 branches and 3,295 ATMs in 528 cities for the fiscal year ending March 31, 2009.

WEAKNESSES

We would avoid the larger banks in the Great Britain and Ireland, particularly those that that have participated in government recapitalization programs, such as The Royal Bank of Scotland Bank plc (RBS) and Lloyds Banking Group plc (LYG) in Britain and Allied Irish Banks (AIB) and The Governor and Company of the Bank of Ireland (IRE).

In return for the government capital and asset quality protection, these banks must submit to other government intervention, including limits on dividend payouts and nomination of board members. This will limit their financial flexibility for awhile and raises issues of complete nationalization, which could continue to hurt share price performance.

Current Sells include Banco Bilbao Vizcaya Argentaria, S.A. (BBV) and Banco Santander Central Hispano, S.A. (STD), both headquartered in Spain. In Spain, the recent collapse in housing and construction, which propelled economic growth for the last decade, is expected to stall for the next few years. Moreover, the International Monetary Fund (IMF) believes that Spain will be harder-hit by the global economic downturn than other European countries. Indeed, Spain's unemployment rate was 17.4% at the end of March, more than double the level a year ago. Zacks Investment Research

Chicago, IL - April 28, 2009 - Zacks.com announces the latest Industry Outlook. Today's outlook from Zacks Equity Research analyst Claudio Freitas discusses the Latin American sector. Highlighted stocks include: Vivo (VIV), Embotelladora Andina (AKO.A) and Gerdau (GGB).

Here is the latest on the Latin American sector:

In the current economic environment, what seems completely odd are the still unbelievably high Brazilian interest rates. After two cuts this year, Brazilian domestic rates still are at 11.25% per year. We believe Brazilian domestic rates will continue to fall in the very short-term, reaching somewhere in the 9% to 9.5% range in the end of 2009, despite the continued warnings of the Brazilian Central Bank over the so called "inflation risk." In fact, the Brazilian Central Bank is very orthodox -- it looks like a new version of the old Deutsche Bundesbank.

Since the Brazilian banking system remains healthy and solid, lower rates are not transformed into a liquidity trap. Amazingly, the total amount of consumer credit in Brazil already reached pre-crisis level. Despite the effect of the crisis in Latin America, which has been huge, we still believe that companies focused in local markets remains a great investment alternative for this difficult moment. Lower rates in Brazil will help to increase domestic consumption and counterbalance the effects of the crisis. Other Latin countries such as Chile and Peru are also well positioned to face the crisis.

In such a business environment we would recommend some Brazilian domestic focused companies like the telecom companies Vivo (VIV). Outside Brazil we like Embotelladora Andina (AKO.A) in Chile.

On the other side, we would avoid highly levergaed raw material producers exposed to the U.S. market like Gerdau (GGB).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=2678

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About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment

Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=4581. 

Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release. 

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security. 

Contact:Mark VickeryWeb Content Editor312-265-9380Visit: www.zacks.com

The market has already reacted to this understanding. Brazilian and Chinese equity markets have been outperforming the U.S. market by far, and we expect this trend to continue in the very short-term. Even commodity stocks, which are very cyclical, have been appreciating lately. This is more difficult to understand and explain.

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, we remain skeptical on commodity stocks -- or in other words, there are less risky and equally profitable (at least) alternatives in the Latin American domestic market.

Brazilian IGP (General Price Index) was -0.33% for the first 20 days of April against -0.36% for the same period in March. The IPA index (similar to the PPI) was -0.64% during the first 20 days of April from -0.65% in same period in March. It seems that inflation in Brazil is getting closer to the international deflationary trend. This is particularly important at this point because between June and August the annual harvest reaches the most important moment in Brazil, and agricultural prices have a seasonal tendency to decline in the beginning of the second half of the year.

In such an economic environment, what seems completely odd are the still unbelievably high Brazilian interest rates. After two cuts this year, Brazilian domestic rates still are at 11.25% per year. We believe Brazilian domestic rates will continue to fall in the very short-term, reaching somewhere in the 9% to 9.5% range in the end of 2009, despite the continued warnings of the Brazilian Central Bank over the so called "inflation risk." In fact, the Brazilian Central Bank is very orthodox -- it looks like a new version of the old Deutsche Bundesbank.

Since the Brazilian banking system remains healthy and solid, lower rates are not transformed into a liquidity trap. Amazingly, the total amount of consumer credit in Brazil already reached pre-crisis level. Despite the effect of the crisis in Latin America, which has been huge, we still believe that companies focused in local markets remains a great investment alternative for this difficult moment. Lower rates in Brazil will help to increase domestic consumption and counterbalance the effects of the crisis. Other Latin countries such as Chile and Peru are also well positioned to face the crisis.

OPPORTUNITIES

In such a business environment we would recommend some Brazilian domestic focused companies like the telecom companies Vivo (VIV) and Oi Participacoes (TNE), consumption products producer like AmBev (ABV), fuel retailers like Grupo Ultra (UGP), high-dividend utilities like Telesp (TSP) and Cemig (CIG). Outside Brazil we like Embotelladora Andina (AKO.A) in Chile.

WEAKNESSES

On the other side, we would avoid highly levergaed raw material producers exposed to the U.S. market like Gerdau (GGB) and Cemex SAB de CV (CX).Zacks Investment Research

The market has already reacted to this understanding. Brazilian and Chinese equity markets have been outperforming the U.S. market by far, and we expect this trend to continue in the very short-term. Even commodity stocks, which are very cyclical, have been appreciating lately. This is more difficult to understand and explain.

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, we remain skeptical on commodity stocks -- or in other words, there are less risky and equally profitable (at least) alternatives in the Latin American domestic market.

Brazilian IGP (General Price Index) was -0.33% for the first 20 days of April against -0.36% for the same period in March. The IPA index (similar to the PPI) was -0.64% during the first 20 days of April from -0.65% in same period in March. It seems that inflation in Brazil is getting closer to the international deflationary trend. This is particularly important at this point because between June and August the annual harvest reaches the most important moment in Brazil, and agricultural prices have a seasonal tendency to decline in the beginning of the second half of the year.

In such an economic environment, what seems completely odd are the still unbelievably high Brazilian interest rates. After two cuts this year, Brazilian domestic rates still are at 11.25% per year. We believe Brazilian domestic rates will continue to fall in the very short-term, reaching somewhere in the 9% to 9.5% range in the end of 2009, despite the continued warnings of the Brazilian Central Bank over the so called "inflation risk." In fact, the Brazilian Central Bank is very orthodox -- it looks like a new version of the old Deutsche Bundesbank.

Since the Brazilian banking system remains healthy and solid, lower rates are not transformed into a liquidity trap. Amazingly, the total amount of consumer credit in Brazil already reached pre-crisis level. Despite the effect of the crisis in Latin America, which has been huge, we still believe that companies focused in local markets remains a great investment alternative for this difficult moment. Lower rates in Brazil will help to increase domestic consumption and counterbalance the effects of the crisis. Other Latin countries such as Chile and Peru are also well positioned to face the crisis.

OPPORTUNITIES

In such a business environment we would recommend some Brazilian domestic focused companies like the telecom companies Vivo (VIV) and Oi Participacoes (TNE), consumption products producer like AmBev (ABV), fuel retailers like Grupo Ultra (UGP), high-dividend utilities like Telesp (TSP) and Cemig (CIG). Outside Brazil we like Embotelladora Andina (AKO.A) in Chile.

WEAKNESSES

On the other side, we would avoid highly levergaed raw material producers exposed to the U.S. market like Gerdau (GGB) and Cemex SAB de CV (CX).Zacks Investment Research

Rather, I thought it would be interesting to have a look at one of the (relative) success stories in the midst of the economic mire in which we find ourselves. The economy in question is Chile, and apart from Bloomberg's report that Finance Minister Andres Velasco, after having been "burned" back in November, is now almost a rock start the point is well worth pondering.

(cut and paste at my discretion)

The Chilean peso has risen almost 10 percent against the dollar this year to become the best-performing currency among emerging markets. The country’s economy is expected to grow 0.1 percent in 2009, as the region contracts 1.5 percent, according to the International Monetary Fund. While Chile stashed away copper profits, neighboring Argentina boosted spending when revenue from soybean exports rose, leaving it short on cash to stimulate the economy this year.

(...)

Velasco set up funds to invest the copper windfall abroad, mostly in government bonds. He announced plans to spend the interest from savings on scholarships and helped Bachelet extend social security to 1.3 million people. In his first three years in office, Velasco posted the biggest budget surpluses since the country returned to democracy in 1990. In 2007, Chile became a net creditor for the first time since independence from Spain in 1810.

Last July, copper reached a record of $4.08 a pound. By year-end, the central bank had built $23.2 billion of reserves. The government had $22.7 billion in offshore funds and about $2.8 billion in its own holdings.

After Lehman Brothers Holdings Inc.’s Sept. 15 bankruptcy sparked a global credit freeze, Velasco and De Gregorio had the equivalent of more than 30 percent of GDP available if needed to shore up Chile’s banks and defend the peso. The price of copper plummeted 52 percent from Sept. 30 to year-end, and Velasco dusted off his checkbook. In the first week of January, he and Bachelet unveiled a $4 billion package of tax cuts and subsidies. “He has been vindicated,” said Luis Oganes, head of Latin American research at JPMorgan Chase & Co. in New York, who studied under Velasco.

The story about the copper windfall in Chile is a remarkable story really and as I reported in an extensive review of the economy back in October Chile's government went into the crisis in the rare role as a net credit with debt to gdp at -11%. Moreover, I have also shown how Chile has managed to wield the benefits of the demographic windfall (the demographic dividend) rather well.

If we look at some indicative economic evidence it does indeed seem as if Chile is the odd man out in Latin America with the Peso performing somewhat better than the main benchmark (according to me) in the form of the Brazilian Real as well as the markedly lower increase in sovereign debt spread due to the crisis. 

So, I guess the question is then. Should you invest in Chile? Clearly, Chile is also like most other countries currently in a recession, but then again why not? I hold that Chile is one of the best opportunities to pick up a decent return in the context of an otherwise rather rugged emerging market edifice. But then again, I am not an investor.

[Disclosure for Seeking Alpha: No positions]

---

[1] Although please do retort in the comments section. And RP, you can bugger off!