Finally, Some Good News from Brazil

Brazil CurrencyEven in the context of the impact of the Federal Reserve’s tapering of quantitative easing on all emerging markets, recent economic news from Brazil has been disappointing. I was glad that there was good news from Brazil with the Brazilian Institute of Geography and Statistics announcement that unemployment in six of the country’s largest metropolitan areas decreased to an average of 5.4 percent last year, from 5.5 percent in.2012. When viewed in the context of unemployment in the U.S. or the eurozone, this is a very low unemployment rate.

But short-term growth in Brazil is another matter. The country likely finished 2013 with growth around 2.1 percent, the third consecutive year of growth below 3 percent. Inflation in Brazil is also an issue. Inflation likely ran close to 6 percent last year, higher than the government had targeted.

It wasn’t supposed to be this way. At the beginning of last year, Brazil’s government optimistically projected 2013 growth of 4.5 percent, citing an expectation for an overall  improvement in the global economy.

It doesn’t look like there will be a turnaround in Brazil’s economy anytime soon. Growth for this year is likely to be around 2 percent, and will be impacted by Brazil’s central bank’s indication that it will raise rates to try to rein in above-targeted inflation.

But I remain bullish on the prospects for emerging markets compared to those of mature economies over the coming decades. I am definitely optimistic for Brazil’s economic future. It’s easy to forget that Brazil, with a population of slightly under 200 million, is Latin America’s largest economy, and will continue to be the engine of the regions growth.

For investors, structural changes in Brazil’s economy are a necessity. The country’s economy needs to change from one dependent on exports and infrastructure spending, to an increased consumer economy. I am optimistic that this will occur as more Brazilians enter the middle class and become consumers.

Many Brazilian small and medium sized enterprises are being challenged by the country’s low growth rate, inflation, and the difficulty in obtaining equity or debt financing from within the country. I, along with many global investors remain bullish as to the prospects for Brazil’s economy. It’s increasingly clear to me and many long-term investors that Brazil and many other emerging markets will outperform most mature economies over the coming decades.  But, it continues to be a challenge to convince management of Brazil’s smaller companies that now there is global equity capital available from global investors with a long-term investment horizon.

Author: Jeffrey Friedland

Email: jof@friedlandcapital.com

Twitter: @jeff_friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.

He is the CEO of Friedland Global Capital, a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives, and accessing global equity capital.

A Look at Southeast Asian Economies Quickly Leads to Indonesia

Indonesia currencyIt is time to be bullish on emerging markets and look at their long-term prospects.The recent emerging market capital outflows and the impact on emerging market currencies of the U.S. Federal Reserve’s tapering of its quantitative easing should be viewed as just a bump in the road.

It’s hard to ignore the news when plotting or adjusting an investment strategy, and issues impacting emerging markets as a class of investments have definitely been in the news.  If one can get beyond the headlines, two key factors should be focused on, population growth and the growth of middle class consumers.

A region that is projected to be a hot spot of global economic growth over the coming decades is Southeast Asia. It has been ignored by many global investors, and has been in China’s shadow for too long. I am convinced that the region will come into its own over the coming decades. Key to understanding the region’s importance for investors is to look at the amount of foreign direct investment.  In 2012, foreign direct investment into China totaled $121 billion. Southeast Asia was the recipient of almost that much, $111 billion.

The ten countries that make up the Association of Southeast Asian Nations (ASEAN) have a population of 620 million. This population is larger than the combined population of North America, Latin America and the Caribbean. It is also larger than that of the eurozone or North Africa and the Middle East together.The five core ASEAN countries, Indonesia, Malaysia, the Philippines, Singapore and Thailand have grown faster than any other geographical group of countries over the past five years. These ASEAN countries had a combined gross domestic product of over $2.2 trillion in 2012, larger than that of Russia, and about the same as that of Brazil. Many economists expect the region’s GDP to double by 2020.

One Southeast Asian country, Indonesia. stands out as deserving more attention than the others in the region. With a population of 250 million, not only is Indonesia the largest country in Southeast Asia, it also the fourth most populated country in the world.

Since the early 1990s, Indonesia has made significant strides. The country has adopted a more inclusive political system, reduced the authority of its military, empowered local jurisdictions, achieved political stability across its vast archipelago, and for the most part prospered economically.

Since Indonesia is a major emerging market, I have been pushing for the country to be formally added to the BRIC group of countries, which now include not only Brazil, Russia, India and China but also South Africa. This, by itself, would bring well deserved attention to Indonesia.

But all is not rosy in Indonesia. As was the case with most emerging markets, Indonesia was hit by the repatriation of capital in response to the anticipation of the tapering of quantitative easing, and then by the beginning of tapering itself. Indonesia’s stock market and its currency were also hard hit.

Indonesia has relied on exports for its growth, and most of those exports have been commodities, with China being the principal customer. For the five year period of 2005 through 2011 Indonesia doubled its annual exports from $84 billion to $204 billion.

From 2000 to 2013 Indonesia’s GDP grew at an average annual rate of 5.4 percent. For the third quarter of 2013, the country’s economy grew 5.62 percent. compared to the same quarter of 2012. China’s growth rate has exceeded that of Indonesia, but China has its own set of challenges. Indonesia’s historical growth rate is impressive, especially when one compares it to that of the U.S. or the eurozone.

Indonesia is a major player in global metal markets. The country accounts for around 20 percent of the world’s nickel supply and 10 percent of its aluminium supply. Rubber, palm oil, coal and iron ore accounted for over one-half of the of Indonesia’s exports. Due to decreased demand from China, Indonesia was significantly impacted by a decline in the price of many commodities.. Over the past few years, easy credit thanks to the U.S. Federal Reserve and a booming market for commodities avoided Jakarta from having to make what many see as needed structural changes in the country’s economy.

This year is an election year in Indonesia. Both legislative and presidential elections are scheduled, and concerns have been voiced about the political impact of nationalism and populism in the elections. There is a general hope that the outcome of the July presidential elections will be crucial in cementing democratic reforms. A major challenge for the country’s new regime will be how to rapidly increase its middle class, and to increase the size of its consumer market.

Indonesia’s ore and concentrate exports have come to a complete halt, after both a ban on ore shipments and an export tax were imposed a couple of weeks ago. I understand the government’s political and economic objectives of forcing local producers and exporters to process ore domestically to boost industrial development. I can also understand the government’s frustration that mining companies haven’t established processing facilities in the country at all, or at a fast enough rate. This ban on exports plays well to many of the country’s population, especially in an election year, but my conclusion is that this ban will not last for long.

In conclusion, global investors should put Indonesia on their radar screens and find a way to participate in the future growth of the world’s fourth most populous country.

Author: Jeffrey Friedland

Email: jof@friedlandcapital.com

Twitter: @jeff_friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.

He is the CEO of Friedland Global Capital, a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives, and accessing global equity capital.

My Optimistic Outlook for Emerging Markets

Emerging MarketsSince early last summer, the performance of emerging market equities has been disappointing at best. Investors withdrew an estimated $26 billion from emerging market equity funds last year. Today, there is a high-level of pessimism about the asset class. The downturn in emerging markets essentially started last May with what has been described as a “taper tantrum” over concerns of the impact of the U.S. Federal Reserve’s eventual tapering on emerging market economies.

Many investors are concerned regarding emerging market currencies and the likely impact of the continuation of the Fed’s tapering. The big risk in emerging markets this year is focused on currencies and how they will react to the macro environment, with many investors concerned about the ability of emerging markets to deal with reduced liquidity. These concerns have unfairly impacted many investors’ long-term views of emerging markets economies. Many investors have also conveniently forgotten about the growth engines of many of these countries, specifically population growth and an increasing consumer middle class.

I’m continuing to take a longer-term and optimistic view of emerging and frontier markets. I have concluded that a repeat of the emerging market economic crises of the 1990s are unlikely. Some poorly managed countries, such as Argentina, may default again, but I am not concerned regarding contagion. Most emerging market economies are in pretty good shape despite the impact of the Fed’s tapering and their own economic and political challenges. These countries will benefit from any general global upturn in growth.

So, what should an investor do? To me it’s clear. When one looks at the longer-term prospects for emerging markets, it’s easy to conclude that many of the countries will serve as engines of global growth. Some countries immediately come to mind. These include China, Indonesia, Mexico, Poland and Brazil. The sell-off in equities in many of these countries provides a real buying opportunity for those investors who understand the impact of huge populations and the increasing middle class in many emerging markets.

What does this mean for entrepreneurs and business owners in emerging markets who are dealing with the challenges of obtaining local bank credit or having difficulty in accessing equity? For these companies, there has never been a better time to seek foreign capital from investors who are cognizant of the long-term prospects for many of these countries and who truly understand the causes and minimal long-term impact of the Feds’ tapering and its short-term effect on currencies.

Author: Jeffrey Friedland
Email: jof@friedlandcapital.com
Twitter: @jeff_friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.

He is the CEO of Friedland Global Capital, a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives, and specifically accessing global equity capital.

An Alternative View of China’s Economic Growth

ChinaMuch has been said about China’s reduced economic growth. China’s economy finished 2013 at 7.7 percent, generally considered to be lackluster. Many have viewed the slight decline of the rate from 2012”s growth rate of 7.8 percent as a sign that China’s economy is in for a hard landing. To a great extent that is wishful thinking among those who are cheering for China’s economic demise.

It’s widely acknowledged that China has altered its growth model, and that the years of annual growth in excess of 10 percent are long gone.The key to China’s economic future is sustainable growth, and annual growth in the 7 to 8 percent is likely the new normal for the foreseeable future.

I remain bullish on the long-term prospects for China’s economy.Compared to the economic growth of the U.S. and the eurozone, China’s growth rates for last year were at a minimum spectacular. One can only imagine the American exuberance if the U.S. economy grew at a rate anywhere close to 7.7 percent.

The dollar value of the growth of China’s economy last year was $818 billion. To view this growth rate in perspective, China’s economy grew in 2012 slightly less than the entire value of Indonesia’s entire economy, a country with a population of 250 million, and the world’s 16th largest economy.

What does this mean for 2014? If China’s economy grows at a rate of only 7.7 percent this year, over the two-year period of 2013 and 2014, China will have added to its economy an amount equal to the entire value of Australia’s economy. Australia’s economy was valued at $1.54 trillion in 2012, and is the world’s tenth largest economy.

What does this mean for investors?There is no question that China has its challenges. It’s clear to me that for the next few decades, China’s growth rate will likely exceed that of any other country or region. For both individual investors seeking opportunities in the world’s fastest growing economy, it’s likely that Chinese listed companies and exchange traded funds will outperform their peers in most other countries. For institutional investors, including private equity funds and wealth funds, Chinese investments will likely provide returns exceeding those generated anywhere else.

Author: Jeffrey Friedland
Email: jof@friedlandcapital.com Twitter: @jeff_friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.


He is the CEO of Friedland Global Capital., a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives.

This Year Will Be Hong Kong’s Year To Be The World’s IPO Leader

ChinaSince my book, All Roads Lead to China, an Investor Road Map to the World’s Fastest Growing Economy was published in November, many have questioned the sustainability of China, and its economic and political systems.

In the book, I acknowledged that China faces challenges, but indicated that China would likely remain the engine of global economic growth for the coming decades. I am now more optimistic than ever regarding China’s long-term prospects.

Over the coming decades I see China increasingly dominating the financial services sector. With 2014 underway, it’s already clear that this year’s market for initial public offerings (IPOs) will be principally about Asia.

We’re less than two weeks into 2014, and it appears that Hong Kong will likely regain the IPO crown that it held from 2009 through 2011. Two major IPOs are already on on the calendar of the Hong Kong Stock Exchange.

Hong Kong mega-tycoon, Li Ka-shing is starting to take orders today for the $3.6 billion IPO of his Hong Kong electricity assets, Power Assets Holdings. This IPO will be the world’s largest since the Tokyo IPO of Japan’s Suntory Beverage & Food last July. The Power Assets Holdings’ IPO will be Hong Kong’s largest since AIA’s US$20.1 billion IPO in 2010.

The China based pork producer, Shuanghai International Holdings, which, in a highly publicized, cross-border transaction bought the U.S. pork producer Smithfield Foods, Inc. last year, intends to raise around US$5 billion in a Hong Kong IPO in April. The Shuanghai IPO will dwarf the Power Asset Holdings IPO, and the company is expected to file its formal application with the Hong Kong Stock Exchange on January 24th.

It doesn’t surprise me that these large IPOs are scheduled for the Hong Kong Stock Exchange. With continuing economic sluggishness in the U.S. and Europe, I see Asia’s exchanges dominating this year’s IPO market.

Author: Jeffrey Friedland

Email: jof@friedlandcapital.com  Twitter: @jeff_friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.

He is the CEO of Friedland Global Capital., a firm that  assists companies in emerging and frontier markets in achieving their corporate finance objectives.

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The Legalization of Recreational Marijuana Will Be Driven by States’ Quest for a New Source of Tax Revenue

Mairjuana LeafOn January 1, Colorado became the first state to legalize the growing and purchase of recreational marijuana. Washington State will be following Colorado’s lead and legalizing marijuana this summer.

Retail sales of marijuana in Colorado on New Years Day totaled $1 million. It has been reported that sales for the first five days of January exceeded $5 million, all with a very limited number of retail marijuana stores open for business in the state..

Following Colorado’s and Washington’s lead, Alaska’s Campaign to Regulate Marijuana submitted more than 45,000 signatures to the state’s  election officials, with only 30,000 confirmed signatures required to place the initiative on an August  state ballot.. Tim Hinterberger, one of the sponsors of Alaska’s initiative, was quoted as saying. “Replacing marijuana prohibition with a system of taxation and sensible regulation will bolster Alaska’s economy by creating jobs and generating revenue for the state.”

Colorado’s taxes on recreational marijuana are considerable. The state has levied a 15 percent wholesale or excise  tax on marijuana, payable when the product is sold from the grower to a retailer. There is also a special state marijuana sales tax of 10 percent. Colorado’s cities and towns have also established their own marijuana retail sales taxes, which in Denver are 3.5 percent and in Breckenridge are 5 percent, in addition to regular state and local sales taxes. These retail sales taxes add up quickly and depending on the local Colorado county, town or city can easily add 23 to 28 percent to the retail price of marijuana.

Also on the taxation bandwagon, Washington State is imposing a 25 percent excise tax on every phase of the production, processing and final sale of marijuana, in addition to regular state sales taxes of 8.75 percent. A consulting firm hired by the state estimated that the total of all these taxes will add 37 percent to the retail price of marijuana..

The legalization of recreational marijuana is all about economics and taxes for states and local governments. A 2010 study by the Cato Institute forecast that states could save $17.4 billion annually from reduced law enforcement and increased tax revenues, assuming that marijuana production and sales became legal in all states, which is unlikely to occur.

I view the legalization of recreational marijuana as analogous to the growth of casino gambling. In 1931, Nevada, after the impact of the Great Depression of 1929, became the first state to legalize gambling driven by the quest for,a source of tax revenue.  Since then, 20 states and two U.S. territories have legalized casino gambling, motivated by the desire for a new source of tax revenues. In 2012, casino gambling brought state and local governments around $8 billion in taxes.

The legalization of recreational marijuana will not be propelled by its medical benefits, the financial and societal costs of an estimated 6.5 million Americans arrested over the past decade, or the fact that marijuana should never have been criminalized at all. Similar to the expansion of casino gambling, the state-by-state legalization of marijuana will be propelled by the desire by state and local governments for a new source of tax revenues.

Author: Jeffrey Friedland

Email: jof@friedlandcapital.com  Twitter: @jeff_friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.

He is the CEO of Friedland Global Capital., a firm that  assists companies in emerging and frontier markets in achieving their corporate finance objectives.

China Slowly Opens the IPO Floodgates: How Many IPOs can the Chinese Market Absorb?

images[7]China has slowly reopened its market for initial public offerings (IPOs), a market that had been closed by the country’s regulators since October 2012.

In 2010 China was the world’s most active market for IPOs.. That year, 349 companies went public in China through IPOs and raised $71 billion. The decision to close the IPO market in October 2012 was made by China’s securities regulators to draft rules to curb market manipulation, fraud and misconduct by companies going public and their advisers.

Since then, China’s securities regulator, the China Securities Regulatory Commission, indicated a desire to move toward a U.S. style registration system for IPOs.

Right before the new year, China’s Securities Regulatory Commission announced that it had re-opened the country’s IPO market. The commission gave a green light to five companies to go public. Together these companies are seeking to raise $353 million.

The companies approved for IPOs were Neway Valve (Suzhou) Co which intends to raise about $138 million through a listing on the Shanghai Stock Exchange. Four other companies,  Truking Technology Ltd., Guangdong Qtone Education Co., Guangdong Xinbao Electrical Appliances Holdings Co. and Zhejiang Wolwo Bio-Pharmaceutical Co. were approved to list on the smaller Shenzhen Stock Exchange.

There are approximately 760 companies in line to go public in China, many of whom have been seeking IPOs for several years. Despite the opening of China’s IPO market, it’s questionable as to how many of these companies will go public in China this year, or for that matter at all.

Concerns remain as to the market’s ability to absorb hundreds of new offerings, the impact of IPO pricing either being too low or too high, and whether significant IPO after-market buying can be generated to support the potentially huge number of new offerings.

PriceWaterhouseCoopers LLP (PWC) indicated that Chinese IPOs may raise as much as $250 billion this year. PWC indicated that about 40 companies could list on Shanghai’s main stock exchange this year, raising around $16.5 billion, and that 260 companies could list in Shenzhen, raising around $24.8 billion.  This total of 300 companies is slightly less than 40 percent  of the 760 companies queued up to go public.

One state-owned company, the China Postal Express & Logistics Co., indicated a few days ago that it had withdrawn its application for an IPO on the Shanghai Stock Exchange. The company  indicated a need to “adjust its strategy.”  This company is likely the first of many Chinese companies hoping to go public in China who will for a variety of reasons decide not to proceed. with a Chinese IPO. A key factor is their inability to meet the new regulatory requirements being imposed by China’s Securities Regulatory Commission.

A greater number of companies will likely succeed in going public in China this year than the record of 2010, and a record amount of capital may be raised. But, I view China’s newly reopened IPO market as being in for a roller-coaster ride of a year. It’s likely that many of  760 companies lined up to go public will abandon their plans to go public in China and either decide to stay private, seek out private equity funding, or take advantage of increased interest in Chinese IPOs in the U.S., Europe and elsewhere in Asia.

The Hong Kong Market for Chinese IPOs

Since the China IPO market was closed in late 2012, the Hong Kong Stock Exchange has been the preferred listing venue for Chinese companies wanting to go public.

In late December, Harbin Bank China announced that it intended to go public through a Hong Kong IPO with the intent to raise around $1 billion.

Three other Chinese banks completed IPOs in Hong Kong since the beginning of October. China Everbright Bank Co., Bank of Chongqing Co. and Huishang Bank Corp. raised a combined total of $4.9 billion.

It’s questionable how many Chinese companies will go public in Hong Kong this year, as the Hong Kong regulators have tightened their standards for Chinese companies and underwriters of IPOs.

The U.S. Market for Chinese IPOs

Hong Kong is not the only beneficiary of increased interest in Chinese IPOs. Qunar Cayman Islands, completed a U.S. IPO and its shares doubled on its first day of trading. The company is owned by Baidu, China’s leading search engine company, often referred to as the Google of China.

The shares of 58.com, a Chinese classified ad website operator, often compared to the U.S. Craigslist, increased 42 percent on their first day of U.S. trading. The company’s  IPO raised $187 million. Sungy Mobile, a mobile applications company, also went public with Credit Suisse and JP Morgan as the lead underwriters, and Deutsche Bank led the offering of online sports-lottery operator, 500.com,

Other Chinese companies who have taken advantage of the interest by American and global investors are LightInTheBox, an online retailer,which raised almost $91 million in June; the micro-lender China Commercial Credit which raised $8.9 million, and Montage Technology Group which raised $80 million.

The increased interest in IPOs of Chinese companies by American and global investors is a major change from 2012, when only two Chinese companies went public through American IPOs.

The Prospects for Chinese, Emerging Market and Frontier Market Companies Going Public in 2014

With the renewed interest by U.S. and global investors in Chinese IPOs, and the inability of most of these investors to be able to participate directly in IPOs in Shanghai or Shenzhen, 2014 should be a strong year for Chinese IPOs in the United States. But, I don’t believe that the floodgates have opened for U.S. IPOs of Chinese companies. It’s likely that the United States will be a viable alternative for many of the 760 companies planning to go public in China.

The market for companies in other emerging and frontier markets for IPOs or strategies to become public outside of their home countries will also likely be strong. This will benefit companies in countries in Southeast Asia, peripheral Europe and Latin America, including Brazil, Indonesia, Thailand and Poland. There will be viable alternatives for companies in many of these regions to go public in the United States, the United Kingdom, Singapore and Germany, and for some in the resource sector, Australia and Canada.

Author: Jeffrey Friedland

Email: jof@friedlandcapital.com  Twitter: @jeff_friedland

Jeffrey Friedland is the author of “All Roads Lead to China: An Investor Road Map to the World’s Fastest Growing Economy,” which is available in print and Kindle editions at Amazon and other booksellers.

He is the CEO of Friedland Global Capital., a firm that  assists companies in emerging and frontier markets in achieving their corporate finance objectives.