Will the New Year Bring a Renewed Interest in Brazil by Global Investors?

Brazil CurrencyThe Global Financial Crisis of 2008 impacted both mature economies and emerging economies. Emerging markets were particularly impacted, as the crisis ushered in an era of reduced interest by global investors in emerging markets.

Today, the continuing military advances by ISIS in Iraq and Syria, a slowdown in China’s growth rate, the global and regional risks from the spread of ebola, and concerns regarding Russia’s increasingly provocative military actions have all contributed to many global investors retrenching. Many are now taking a wait and see attitude regarding investing in emerging markets.

Reduced oil prices have added to global uncertainty and governments that have a high dependence on oil revenues are being severely impacted. But there are beneficiaries of reduced oil prices. Lower oil prices are having a positive impact on consumers. Paying less for fuel and energy enables consumers to have increased disposable incomes, leading to increased spending on consumer goods.  Consumer spending in the U.S., Europe and other mature economies this Christmas season will likely be a beneficiary.

As we enter a new year, global investors can’t ignore Latin America and its population of 588 million for very long. Two countries, Brazil and Mexico dominate Latin America’s economic output.

With the continuing drug wars and corruption monopolizing the news from Mexico, I’m increasingly focused on Brazil, the world’s seventh largest economy.  With a population of over 200 million, and a GDP of over $2.2 trillion, the entire economy of South America is dominated by Brazil.

President Delma Rousseff’s won a narrow victory over Aẻcio Neves, in the tightest Brazilian presidential election ever. There is hope that the narrow lead will cause Rousseff to change the countries economic policies, but many have questioned how willing the new government will be to make the necessary changes.

A positive development is the appointment of Joaquim Levy as Brazil’s new finance minister. Mr Levy received his doctorate in economics from the University of Chicago and has served with the International Monetary Fund and the European Central Bank.

Levy  immediately committed to restoring balance to the country’s struggling public finances. Many view the appointment of Mr. Levy and his economic team as one of the potentially biggest turning points in Brazil’s economy since Ms. Rousseff took office from her predecessor, the immensely popular Luiz Inácio Lula da Silva in 2011. There is hope among many global investors that Levy will enjoy more autonomy from Rousseff’s administration regarding economic policy than previous finance ministers.

My conclusion is that Brazil will once again be on the radar screens of an increasing number of global investors.

Author: Jeffrey 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.

Mr. Friedland is the CEO of Friedland Global Capital, a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives including accessing global equity capital. He is also the chairman and CEO of INTIVA Inc., a life sciences firm that enables investors to participate in the growing worldwide cannabis industry.

Colorado’s New Cannabis-Friendly Credit Union – Don’t Crack Open the Champagne Yet

Colorado MarijuanaIt was announced this week that the world’s first financial institution established for the marijuana industry could be up and running by the first of January in Colorado.

Fourth Corner Credit Union was issued a state charter to operate Colorado’s first new credit union in nearly a decade.

This announcement has generated a high-level of euphoria in the cannabis industry both in Colorado and nationally, but it’s not yet time to crack open the champagne.

Two major hurdles remain. First, obtaining deposit insurance from the National Credit Union Administration and then obtaining access to the Federal Reserve System.

Deposit insurance is a necessity for Fourth Corner Credit to accept deposits.

Access to the Federal Reserve System is critical for the credit union to be able to provide checking accounts, issue debit cards and deposit customer checks.

My conclusion is that one can’t assume that Fourth Corner Credit Union be able to obtain deposit insurance nor access to the Fed system.  It’s appropriate to conclude that not all employees and management of the National Credit Union Administration and the Federal Reserve are friendly to the cannabis industry.

Assuming that both deposit insurance and access to the Fed system are obtained, it may still not be time to rejoice. The level of scrutiny and compliance requirements for Fourth Corner Credit for the credit union itself and its customers may be overly burdensome for both.

Author: Jeffrey Friedland

Email: jeffrey@intiva.us

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.

Mr. Friedland is the CEO of Friedland Global Capital (www.friedlandcapital.com), a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives including accessing global equity capital. He is also the chairman and CEO of INTIVA Inc. (www.intiva.us), a life sciences company that enables investors to participate in the growing worldwide cannabis industry.

For Almost Two Centuries the U.S. had the Monroe Doctrine – Now China has its Xi Doctrine

Emerging MarketsJames Monroe was the fifth president of the United States. Under his administration what became known as the Monroe Doctrine was first stated in 1823.  The doctrine became a long-standing tenet of  U.S. foreign policy. It declared that the Western Hemisphere was America’s area of influence.  The premise of the Monroe Doctrine was that further efforts by European nations to colonize or interfere in North or South America would be viewed by the United States as acts of aggression, thereby necessitating American intervention. The establishment of the Monroe Doctrine was a defining moment in U.S. foreign policy.

Turning the clock almost 200 years later, China is aggressively implementing its own form of the Monroe Doctrine, not just for countries with which it shares borders, but extending throughout East Asia, South Asia and even into countries bordering the Indian Ocean.

I’ve named this foreign policy the Xi Doctrine, after China’s president Xi Jinping. Xi is using both China’s economic and military tool kit in what he sees as China’s sphere of influence.

After President Obama’s decision to extricate the U.S. from the disastrous wars in Iraq and Afghanistan, in 2010 the Obama administration initiated what it described as a “pivot to Asia.” America’s pivot to Asia was a change in strategy aimed at bolstering the United States’ defense ties with countries throughout the Asia-Pacific region. While many smaller countries in the region were hopeful that it was in fact a pivot by the U.S. to Asia, privately it was viewed by many governments and leaders in the region as  political rhetoric, one that would have minimal if no impact in the region. China went further, viewing Obama as a weak president, America as a declining global power, and saw the regional power vacuum as an opportunity to assert China’s influence in the region.

Since the announcement of America’s pivot to Asia, China’s has taken what many in the West and in Asia considered to be aggressive actions in the East China and South China Seas, areas in which Beijing maintains it has long-standing, historical claims of sovereignty. Beijing views its actions as defensive. These actions by China have rattled China’s neighbors, including Japan, the Philippines, Indonesia and Vietnam. As China likely anticipated, there was no meaningful response by the United States,  thereby providing Beijing  with a green light to continue to assert its role in the region.

Actions by China’s military in the region are only part of the equation. Perhaps more importantly are China’s economic actions in what Beijing sees as its area of influence.

For the first time since the reforms initiated by Deng Xiaoping in 1978, China’s outbound direct investment will exceed the level of foreign investment.

Beijing announced that for the first nine months of this year that China outbound investment totaled $75 billion, an increase of almost 22 percent over the same period in 2013. While not quite ahead of the amount of foreign investment into China, Zhang Xiangchen, the country’s assistant minister of commerce indicated that based on current trends that outbond direct investment would exceed foreign investment by the end of this year.

With $4 billion in government administered foreign exchange reserves coupled with Beijing’s ability to influence foreign investment by both state-owned-enterprises and local private companies and investors, China is mobilizing its economic toolkit. This is being implemented globally, but most importantly in Asia, it’s sphere of influence.

China’s foreign direct investment is attractive not only to the governments of its direct neighbors, but also to country’s throughout the entire Asia-Pacific and Indian Ocean region.

Infrastructure  investments, including pipelines, roads, rail lines and free trade zones have been openly welcomed by governments from Mongolia on the Northwest, Kazakhstan on the West, Pakistan, to the south, its neighbor Myanmar, and even the small island nation of Sri Lanka, off the southeast coast of India.

This foreign direct investment is a key aspect of President Xi Jinping’s strategy in  implementing Beijing’s “Asia-Pacific Dream.” It provides the economic framework that should boost economic growth and improve infrastructure throughout the region.

With a void of power due a lack of foreign policy by America’s Obama administration, China has to a large extent been successful in convincing leadership of countries in its sphere of influence to forget about the U.S and accept the reality that China is the alpha-power in the region, both economically and militarily. China is now using its economic power as a tool, to what the Xi administration see as a reconfigured Asian order, one centered in Beijing.

China’s economic strategy has been described as being similar to the U.S. Marshall Plan that rebuilt Europe after World War II. Others see it as an effort by China to reinstitute a tributary system through which china dominated East Asia for much of 2000 years.

Neither of these conclusions are incorrect.  China has sought to use its influence in the region through both foreign aid and investment as a way to obtain access to Central Asia’s natural resources, with oil at the top of the list.

The Xi Doctrine encompasses China’s “Silk Road Economic Belt,” which includes a transport corridor connecting the Pacific Ocean to the Baltic region, and linking China and East Asia to South Asia. It also includes what Beijing has described as the “21st Century Maritime Silk Road,” which includes Sri Lanka, Kenya and extends to Greece in Europe.

In May of this year Xi was more direct. He touted a new security concept, indicating that “it is for the people of Asia to run the affairs of Asia, solve the problems of Asia, and uphold the security of Asia.” My conclusion is that this statement was the moral justification for the new Xi Doctrine.

What is the implication of the Xi Doctrine for entrepreneurs and business leaders in China, Asia as well as  global investors?  There is only one conclusion, specifically that this century, which has been called China’s century, will bring tremendous opportunities, and the Xi Doctrine is a confirmation of what the future will bring.

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.

Mr. Friedland is the CEO of Friedland Global Capital, a firm that assists companies in emerging and frontier markets in achieving their corporate finance objectives including accessing global equity capital. He is also the chairman and CEO of INTIVA Inc, a life sciences firm that enables investors to participate in the growing worldwide cannabis industry.

The Economies of the Seven Largest Emerging Markets are Now Larger than the G-7

It was inevitable.  On Tuesday the International Monetary Fund released its new World Economic Outlook.  What will be a major shock to many is that the seven largest emerging market economies, consisting of the BRIC countries of Brazil, Russia, India and China, and the MINT countries of Mexico, Indonesia and Turkey now have a combined gross domestic product (GDP) of $37.8 trillion, based on purchasing power parity (PPP). This compares to a GDP of $34.5 trillion for the G-7 countries of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

Also, based on purchasing power parity, China’s economy is now the world’s largest, $17.6 trillion compared to $17.4 trillion for the U.S. economy.

As I discussed in my book, All Roads Lead to China, Purchasing Power Parity is the most accurate way to compare standards of livings between countries. It’s a bit confusing, but the basis of PPP is that residents of one country, should be able to buy the same standard of living, at the same cost, as residents of any other country.

Purchasing power parity solves the problem of comparing countries with different standards of living. It recalculates the value of a country’s goods and services as if they are being sold at U.S. prices.

In 1986, The Economist magazine took a whimsical approach in determining whether currencies were at appropriate market levels. The magazine invented their Big Mac Index.

During the summer of 2013, the price of a McDonald’s Big Mac in the United States was approximately $4.37. The same Big Mac cost $2.57 in China. From this example, one can conclude that Chinese consumers do not require as large an income as Americans to have the same standard of living. The bottom line, it costs less to live in China than it does to live in the United States.

The implications of the seven largest emerging economies now surpassing those of the G-7 are clear.  Increasingly the growth engine of the world’s economy will be emerging market countries.  For investors, the emerging markets are where the real opportunities will be over the coming decades.

Author: Jeffrey Friedland

Geopolitical Risk and Investor Opportunities

The world certainly has its share of geopolitical conflicts, from the Ukraine, to Gaza, to Iraq and Syria, to strife in numerous countries in Africa. Have these wars and conflicts impacted investors? The short answer, as strange as it may seem is “not really.” It seems that the global conflicts are having as much impact on stock markets as the winners of Dancing with the Stars.  

The disconnect between geopolitical events and the world’s stock market is greatly pronounced right now. Most global investors seem to be focused on companies themselves, their cash flows and prospects for the future.  Last week, when international news was led by events in the Ukraine and ISIS controlled territory in Iraq and Syria, the S&P 500 broke 2000 for the first time.  

Today’s global investment climate seems to be more focused on geopolitical opportunities than geopolitical risk. It’s easy to look back into recent history and see other events that have led to opportunities, the ending of dictatorships in Latin America in the 1980s that led to the opening up of markets, the end of Maoism that led to the opening of China, and the tearing down of the Berlin Wall that fled to opportunities in the former USSR.

Perhaps today’s global investors have become complacent, and have concluded that the world will continue to have geopolitical conflicts, but that business and making money has to go on.  

Author: Jeffrey O. Friedland 

Investors Flock Back to Emerging Markets – Bonds, Equities and Currencies are the Beneficiaries

Emerging markets are now back in vogue.  Factors including low yields on European and American bonds are forcing many investors to take another look at emerging markets.  Capital is flowing back into emerging markets at what appears to be the fastest pace in at least a year.Emerging Markets

The current rush to emerging market equity, debt and currencies is a 180 degree reversal from the outflow of $60 billion earlier this year.

Beneficiaries of this inflow of capital include South Africa, Brazil and even Russia.  India and  Indonesia have recently returned to many investors’ radar screens. Both countries are experiencing healthy growth and have new business friendly governments taking power.

One of the most interesting beneficiaries of the influx of capital to emerging markets is Thailand, which so far has had one of the best performing stock markets this year.  Last week’s military coup has had minimal impact on investors.  I guess a coup in Thailand is an ordinary state of affairs. The country has had 11 coups since 1932.

Some of the countries that have the best stock market performance this year are the so-called “fragile five,” countries that it was thought would be the most affected by the tapering of the U.S. Federal Reserve’s quantitative easing. India’s stock market is up 16 percent so far this year, to a large extent due to the country’s new business friendly leader; Brazil’s main stock market index is up 16 percent in just two month’s time; and even Russia’s stock market is a beneficiary. Despite the Ukraine crisis, Russia’s stock market is up 14 percent in the past month.

Slower growth in advanced economies seems to provide a confirmation that economic stimulus won’t disappear anytime soon, which is good news for many countries who many thought were dependent on the flow of cash from quantitative easing for economic growth.  Despite the Fed’s tapering, economic growth has remained steady in emerging markets.  The International Monetary Fund has projected that what it refers to as “developing economies” will grow at almost 5 percent this year, compared to a minimal 2.2 percent in advanced economies.

 

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. He is also the chairman and CEO of Global Cannabis Ventures, a firm that enables investors worldwide to participate in the growing cannabis industry worldwide.

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.