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Stock Market Developments
The stock markets of the world were at a time of indecision when
we last wrote a weekago. That indecision, spurred on principally by
the decision of the government of the
USA to re-separate the functions of commercial and investment
banking has become, at
least for the moment, a world bear market.
Figure 1.
Stock Markets in 2010
90.0%92.0%
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96.0%
98.0%
100.0%
102.0%
104.0%
12/3
1/200
9
1/2/20
10
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10
1/6/20
10
1/8/20
10
1/10/2010
1/12/2010
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1/16/2010
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/2010
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/2010
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/2010
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/2010
DJI FTSE CAC 40 HSI Iboves a S&P
Figure 1, above shows the performance of six stock markets,
based upon a comparative
analysis of their respective equity indices from the beginning
of 2010. The indices chosen
are the Dow Jones Industrial Average (DJI), and the Standard and
Poors 500 (S&P
500) of the USA, the Financial Times and London Stock Exchange
100 Index (FTSE100) of the United Kingdom, The Cotation Assistee en
Continu 40 (CAC 40) of
France, China`s Hang Seng Index (HSI), and Brazil`s Indice da
Bolsa de Valores de
Sao Paulo (Ibovespa). 100% represents the index for each market
at close of businesson the last day of trading of 2009.
We have become accustomed to seeing the IBovespa index being
among the two bestperformers between October 2008, and December,
2009. Indeed, we have been surprised
at the Ibovespa`s resilience given the Brazilian Government`s
successful attempts to
discourage foreign investors from investing in the equity and
fixed income marketsthanks to a flat tax at the moment of
investment of 2%. However, in looking at the stock
market performance in through January 26th, we see a new picture
emerging.
The two worst performing indices are those of the emerging
markets represented, Brazil
and China. The HSI of China had been the front runner since the
crisis for a long time,but due to an increase in Yuan interest
rates in November 2009, that market became
essentially static. The Brazilian market, as measured by the
Ibovespa continued its climbthroughout December, reaching over
70.000 points on eight consecutive business days.
The new story, however is one of the HSI falling 8.1% in 2010,
while the Bovespa has
fallen 4.5%. Meanwhile, the performances of the stock markets in
the more developedcountries have fallen by: CAC 40, 3.3%, FTSE,
2.5%; the Dow Jones, 2.2%, and the S&P
2.1%.
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What is going on?
First, there is a general lack of consensus, not so much about
whether the world`s
economic situation will continue to improve, but how quickly.
Secondly there are serious
concerns about the amount of liquidity in the world. There was
an enormous amount ofartificial liquidity created by the various
Central Banks to aid with the crisis, and that will
slowly be withdrawn through 2010. There is also the investor
liquidity that was in the
market throughout 2009, but which has been absorbed through the
acquisition of evermore expensive assets. Thirdly, investors have
seen markets rise rapidly over the last
year, and have come to the conclusion that the markets upward
mobility is limited, and
thus they are withdrawing to other assets and other markets.
Also, investors in Brazilian stocks are becoming clearer about
the effects of the crisis on
the Brazilian economy. While the story continues to be good
there is more concern about
Brazilian Governmental indebtedness, and a bet that in an
election year that indebtedness
will not be closely controlled. Also, of concern is the
indebtedness of Brazilianconsumers which is growing a lot faster
than income, and finally, the parlous state of the
trade balance which will probably only get worse, save a
significant realignment of theReal/ US Dollar exchange rates.
