G-7: More QEs Coming

From Bloomberg, (bold highlights mine)

Group of Seven nations sought to head off a collapse in global investor confidence after the U.S. sovereign-rating downgrade and a sell-off in Italian and Spanish debt intensified threats to the world economic recovery.

The G-7 will take “all necessary measures to support financial stability and growth,” the nations’ finance ministers and central bankers said in a statement today. Members will inject liquidity and act against disorderly currency moves as needed, they said.

QE 3.0 looks like a dead giveaway.

Scorecard From This Week's Global Equity Bloodbath

This chart from Bespoke presents a good coverage of this week's resurgent volatility. According to Bespoke,

``As shown, both the G-7 and BRIC countries sit at the top of the list of worst performers. The countries that have held up better are located mainly in the Middle East, Africa, and Eastern Europe.

``Combining the BRICs and the G-7, Russia has done the worst since Tuesday with a decline of 6.33%. But Brazil and the US are not far behind with declines of more than 5%. Italy, France, and Germany are all down around 4.75%, followed by Britain at -3.81%. There has been lots of talk about China partly at fault for the global sell-off, but the country itself is down just 3.64% since 1/19. Japan has by far done the best of the G-7 and BRIC countries over the last three days with a decline of just 1.62%."

While it is true that BRICs got equally hit as hard as the G-7, the picture isn't complete. In any comparison, points of references are important because they can tilt balance of presentation.

Remember, in 2009 the BRICs outperformed the G-7 by a wide wide wide margin hence it should be natural for them to bear the brunt of the recent carnage.

However, last week's selloff reveals that the damage hasn't been significantly different. And if the current correlation continue, one can expect the BRICs to materially outperform its G-7 counterparts anew.

Although as seen from a year to date (or on a 3-week) basis on the left column, the BRICs have marginally underperformed the G-7, however 3 weeks is too early to call.

Nevertheless the overall market conditions should give us some clues.

As mentioned by Bespoke some markets in former crisis plagued Eastern Europe and the Middle East have outperformed.

For instance, Estonia was up 7% on a week on week basis but is up 30% (!!!) on a year to date basis and so with her peers (also based on year to date) Latvia 15.04%, Lithuania 11.29%, Romania 7.2% and Ukraine 7.08 as well as Malta 13.27, Kenya 11.73%, Egypt 9.76% and so forth...

While everyone's focus (as indicated by Bespoke's article) has been on how the key markets got hammered (BRICs and G-7), what may have been ignored by the rest is how the broad periphery (emerging markets) had been vastly unfazed by the ruckus.

This for us, implies two significant messages:

First, that the periphery signifies delayed or belated reaction from the still to be felt ripples or

Second, that many emerging markets will likely show signs of meaningful divergences (decoupling), which could mark the theme for 2010.

And if it is the latter scenario, then this week's meltdown could be suggestive of a bear market trap.

Graphic: BRIC Versus G7

This is graphic is a comparative from the Financial Times between major emerging economies coined as the BRIC (Brazil, Russia, India and China) relative to G7 economies.

The chart highlights both the positive and the negative aspects of the BRICs.

Nonetheless I find this an apples and oranges comparison, therefore impertinent (which is why one should be cautious with the mainstream).

The advantage of the BRICs on the left corner is predicated on the projections of future performances: growth contributions, share of the economy and growth rate.

Whereas the right corner accounts for as the disadvantages of the BRICs which reflects on the present conditions (lower per capita GDP and weak private consumption).

The comparative graphic should have shown projections on similar time dimensions, unless the FT assumes that while BRIC outperforms in growth, per capita and private consumption remains static?!

Decoupling in Global Pay Rates?

The Economist publishes a chart depicting planned rates of pay hikes across the globe.

The Economist says, ``THE annual pay letter is usually a time of hotly-awaited anticipation for most employees. In the midst of a global recession, however, simply keeping your job may have to be reward enough. In a survey of 2,000 companies in over 80 countries, at least 25% of employers say they are freezing pay this year, according to Hay Group, a consultancy. Where increases are planned, they will be most miserly in rich countries. British and German employers plan to give rises of under 1.5%, on average, with American, Italian and Canadian firms offering workers under 2%." (bold highlight mine)

We look at the same data but see a different theme: Decoupling. The expected pay rates increases manifests of a yawning gap between emerging markets and G7 economies.

Decoupling a myth?

Global Stock Market Performance Update: The BRICs and Emerging Markets Dominate Gains

Bespoke Invest gives us a good rundown on the performances of global stockmarkets as of Apr 16th.

According to Bespoke, ``The MSCI World index bottomed on March 9th just as the S&P 500 did. Below is a table highlighting stock market performance for 83 countries around the world since March 9th and year to date. As shown, Ukraine is up the most since March 9th with a gain of 67%. Ukraine is followed by Puerto Rico, Romania, Peru, and Russia. Even after rallying 52.7% since March 9th, Puerto Rico is still down 34% year to date. Ten countries are actually down since March 9th, with Bermuda falling the most at 22%.

``Of the BRIC countries, Russia has done the best since March 9th, followed by India (34%), Brazil (24%), and then China (19.6%). Italy has been the best performing G-7 country with a gain of 37.7%. The US ranks second in the G-7, followed by Germany, Japan, and Canada. The UK has been the worst performing G-7 country since March 9th with a gain of 14%.

Bespoke uses the March 9th low as reference point from which has been premised from the US bottom.

We don't like to get caught in a selective perception since as the stockcharts.com above shows that China and Emerging Markets have begun to recover even prior to the US bounce.

We also don't buy the argument that the reason for outperformance of EM economies has been due to the degree of losses suffered. This "rear view mirror" perspective glosses over the overall boom bust performances of EM versus G7 from 2003-todate. It's no use to nitpick over "technicalities" though, since the playing field is always about tomorrow.

And our thought is that EM markets are likely to continue to outperform the structurally credit bubble-bust impaired G7 economies.

On a year to date basis, Bespoke adds, ``Year to date, Peru ranks first with a gain of 45.47%, followed by China, Pakistan, and Taiwan. Bermuda, Costa Rica, and Nigeria are down the most year to date."

We'd like to alter how the above quote has been framed.

On a year to date basis:

Except for Canada whose gains registered 2.58%, the rest of the G7 markets are all negative: Italy 6.45%, US 5.47%, Germany 4.17%, Japan 1.18%, France 5.59% and Britain 8.6%.

In contrast the BRIC's scorecard are all markedly positive: Brazil 21.2%, Russia 29.7%, India 13.48% and China 39.18%. Moreover, most EM markets are likewise up.

Our point: Global financial markets presently debunk the claims that "decoupling is a myth".

Global Stock Market Performance Update: The Charge of the BRICs

Year to date updated national stock market benchmark performances by Bespoke Invest...(as of March 26th)

Says Bespoke (bold highlight mine), ``Twenty-one countries are up year to date, while 62 are down. One positive that can be drawn from this table is that all four BRIC countries are now in the black for 2009. These countries were the leaders during the last bull market, and they have also been some of the biggest decliners during the bear. The fact that these key countries are now trending upward is a sign that global investors are beginning to take more risk. China is up the most of all countries at 29.71%, while Russia is up 19.11%, Brazil is up 12.13%, and India is up 3.69%."

My comment:

Risks can be defined in relative and/or subjective terms.

US policies have presently been directed towards the "nuclear option" of currency devaluation via the Quantitative Easing or "Gonoism". These suggest of increasing inflation, credit and currency risks for the US. Alternatively, the rising risk profile of the US implies that US assets are becoming "riskier" relative to the BRICs.

Besides, given that international portfolio flows are expected to markedly contract, the positive performances of the BRICs and EM economies could be a consequence of local savings flowing into local assets in response to the global negative interest rates regime.

This has been the case of the Philippine Phisix, which I suspect has been the same dynamic driving most of the BRICs or EM markets.

So one data can be interpreted from two opposing angles.

More from Bespoke ``Unfortunately, all of the G-7 countries are still in the red year to date. Canada has been the best among them, while Italy has been the worst. With a decline of 9.11% year to date, the US is performing slightly worse than the unweighted average of all countries."

My comment: If G-7 countries are down while BRIC are up, isn't this a sign of "decoupling"?