Tuesday, April 22, 2014

Part 2: Sheep economies vs Goat

The Goats [Brazil, India, Indonesia, South Africa,Turkey, Argentina] are in deep trouble, but they are better off today than they were in the late 1990's, when many had fixed exchange rates and borrowed in dollars and other hard currencies. Back then they didn’t want to devalue because it would have increased the local currency cost of their foreign debts. But when Thailand ran out of foreign currency reserves in 1997, the Goats fell like dominoes. That triggered the 1997-98 Asian crisis, which ultimately sank Russia, Brazil and Argentina.

The Goats also have country-specific problems. Brazil is promoting consumer spending to the detriment of investment in industry and infrastructure. It’s also dependent on raw materials and agricultural exports. Turkey is in the midst of a sprawling corruption probe and a political power struggle. South Africa suffers from labor unrest. Energy-dependent Russia is subject to sanctions.

The securities of most emerging markets may get beaten down to the point where they look attractive. I’ll still favor the Sheep [South Korea, Malaysia, Taiwan and the Philippines]. Their economies are well enough managed to make it in a world with limited demand for their crucial exports. The Goats may not collapse and default, but until they get their houses in order, my answer is naaah.

Story via http://www.forbes.com/sites/investor/2014/04/16/emerging-markets-separating-the-sheep-and-the-goats/