Cumberland Advisors Market Commentary – Cry for Brazil, and also for Latin America

The coronavirus is tearing through Brazil, a country ill-equipped to fight the pandemic. It’s hard-right populist leader, Jair Bolsonaro, has dismissed the virus as a “little flu.” COVID-19 is spreading through the population of 210 million, savaging both the inhabitants of the indigenous villages of the Amazon and the 13 million people packed together in the slums (favelas) of Brazil’s cities. It is overwhelming the country’s hospitals.

Market Commentary - Cumberland Advisors - Cry for Brazil, and also for Latin America by William Witherell, Ph.D

As this note is being written, Brazil has 271,628 people who have tested positive, surpassing Italy, Spain, and the UK. Only the US and Russia have more positive cases. Brazil is now the fastest-growing coronavirus hotspot. Last week 13% of all new cases globally were in Brazil. Recorded deaths from the virus of 17,971 are the sixth highest toll in the world. The actual numbers of infected and dead are likely to be much higher, as testing in Brazil has been more limited than in the US and Europe. Brazil has tested under 300 people per million inhabitants while the US has tested 9,482 per million.

What would have been a horrific health crisis under the best of domestic conditions has been made worse by a policy of denial by President Bolsonaro and by political discord between him and some members of his government as well as state governors and mayors. The health ministry advised social distancing; and governors and mayors imposed partial lockdowns, including closures of business and schools and restrictions on public transport. The president said these measures were “scorched earth” policies. He openly violated the social-distancing recommendations of his health ministry and fired his health minister. The new health minister, Nelson Teich, resigned after just four weeks in office, after publicly opposing Bolsonaro’s efforts both to ease social distancing and to promote the use of hydroxychloroquine to treat COVID-19. Teich’s departure statement was noteworthy: “Life is made of choices, and today I chose to leave.”

While many local governors and mayors have enacted stay-at-home policies, the popular support for social isolation measures had declined by early April to a bare majority, according to polls, despite sharply rising infection and death rates. Economic pressures are overcoming fear of the virus for many. Are those who listen to Bolsonaro’s claim that people who are athletic have little to fear aware that the virus is now overwhelming a healthcare system that is not prepared for a pandemic of such a magnitude? The death toll among medical workers is staggering. As of May 7, at least 116 nurses have died, exceeding the deaths of 107 nurses in the US, a country which at that time had more than six times the total pandemic deaths of Brazil.

While Bolsonaro’s base appears to support his demands for ending lockdowns and restarting the economy, his approval ratings have declined. Quite aside from the coronavirus crisis, there has been a strong negative reaction to the resignation of the justice minister, Sergio Moro, who accused the president of political interference in criminal investigations. Bolsonaro fired the head of the federal police, Mauricio Valeixo, whom Moro had appointed. This happens at a time when the president’ three sons, all public officials, are linked to several investigations for corruption. The action was criticized as rolling back the independence of law-enforcement institutions and as a threat to democracy in Brazil. The market reaction was a 7.6% tumble of the main stock exchange index, the Ibovespa, and a 3.5% slide in the Brazilian currency, the real.

Brazilian business leaders who have been supporters of Bolsonaro’s free-market views are said to be increasingly concerned about the economic damage from the coronavirus and the growing political crisis. An index of business confidence fell to the lowest level on record in April. The economic reform program of the highly respected economy minister, Paulo Guedes, has been sidelined by emergency measures that threaten his fiscal-responsibility agenda. Bolsonaro has tried to reassure investors that Guedes is still the “man who decides the economy in Brazil,” but fears that the economy minister may resign persist.

The Brazilian economy is the ninth largest economy in the world and by far the biggest in Latin America, and thus the dominant economic force in the region. Brazil has relatively open borders with 10 other Latin economies. Both disease and negative economic winds can readily flow to the rest of the continent. China is Brazil’s top export market, followed by the US, Argentina, and Europe. Commodities accounted for some two thirds of Brazilian exports in 2015. The deep decline in commodity prices has since become a serious headwind for the economy, now worsened by the global shock to demand dealt by the coronavirus.

Back in November, the OECD predicted that “On the assumption that the reform agenda continues to advance, growth is projected to gain momentum in 2020, advancing 1.7%.” Only five months later, in April, the IMF projected that the Brazilian economy will decline 5.3% this year. This estimate is close to the 5.12% decline projected by Brazil’s central bank, Copom. That number now looks optimistic to us. And we fear that a recovery in Brazil and much of Latin America may take several years. Brazil’s Congress has passed a constitutional amendment that allows the central bank to finally engage in quantitative easing to combat the recession. A massive quantitative easing program now looks very likely. There are some concerns about this development, as the central bank actions could be susceptible to political interference. The bank’s latest statements no longer express concerns about the possibility of excessive monetary easing.

The tragedy unfolding in Brazil looks likely to be repeated in many other countries in Latin America. While the governments of some of these countries have acted more wisely to address the virus, none will be able to escape the pandemic or the severe economic downturn. The continent is the most unequal in the world. More than one third of the population lives in poverty. Adequate testing and social distancing are impossible in the crowded favelas. Half of the region’s workers are in the informal sectors of the economy. Lockdowns will very difficult to design and enforce. Medical facilities are grossly inadequate, as are the levels of public health care broadly available. A humanitarian crisis appears all too likely. We will be writing several more commentaries discussing the effects of the pandemic on other countries in Latin America, including Mexico, Chile, Peru, and Argentina.

Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio
____________________________________________________________________
Sources: Bloomberg, Financial Times, Wall Street Journal, New York Times, OECD.org, IMF.org


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Cumberland Advisors Market Commentary – Opportunities in Japan for Global Equity Investors

The Bank of Japan at its October 30–31 Monetary Policy Committee meeting kept its policy unchanged while indicating it was willing to lower interest rates further into negative territory from their current low levels if needed to maintain progress towards the 2% inflation objective.

Market Commentary - Cumberland Advisors - Opportunities in Japan

he decision not to cut rates at this time was based on the Bank’s belief that the Japanese economy is strong enough to get through the current period of weak global demand. The economy has indeed encountered a “speed bump” that can be attributed to the rise in Japan’s sales tax from 8 to 10 percent on October 1, the major typhoon Hagibis, and the global slowdowns in trade and manufacturing. In addition, economic growth across the Asia region has been weakened by the US-China trade war.

According to the Jibun Bank Flash Japan Composite PMI (Purchasing Managers Index) reported by Markit, the Japanese economy slipped into contraction in October. Manufacturing new orders declined at the steepest pace in almost seven years, while “the service economy exhibited a remarkable degree of resilience.” The consumer sector has been one source of support for the economy as wage growth has been supported by labor shortages. Retail sales surged by over 9% in September in anticipation of the sales tax increase but appear to have fallen off in October. The labor shortages together with capacity constraints have also encouraged business investment.

The OECD notes that, despite the current slowdown, the expansion of the Japanese economy that began in late 2012 is the longest in Japan’s postwar history and is projected to continue through 2020. The Bank of Japan’s forecast is similar, with a pick-up in growth expected in Japan’s fiscal year 2021. Continued supportive monetary policy with very low interest rates and large-scale government bond purchases, together with increased public investment and spending to offset the effects of the sales tax increase, are expected to maintain the expansion. The new US-Japan trade deal and the anticipated elimination of the threat of US automobile tariffs are positive developments. If the current optimism about progress in trade talks between the US and China proves to be justified, Japan’s economy would benefit significantly from the positive effects on the Asia region.

The sustained positive, though modest, expansion of the Japanese economy (the third largest economy in the world) is a stabilizing force for the global economy. The economic policies of Prime Minister Shinzo Abe and the monetary policies of the Bank of Japan under governor Haruhiko Kuroda deserve credit for this performance. Among the important reforms that have been undertaken since Mr. Abe’s accession to power in late 2012 are efforts to increase the participation of women in the workforce. As investors, we appreciate Japan’s ongoing corporate governance reforms. The Financial Times reports that “Among listed companies, the proportion of independent board members has climbed, cash returns to shareholders have surged, and return on equity has almost doubled over the past five years.”

Investors have available a wide range of US-listed ETFs for Japanese stocks. According to ETF.com, there are currently some 28 Japanese equity market ETFs, including six that are leveraged. A number of the ETFs are relatively small, but there are nine with assets under management (AUM) of more than $100 million. The largest by far, with AUM of $13.22 billion, is the iShares MSCI Japan Total Market ETF, EWJ, which tracks a market-cap-weighted index of the investible universe of securities traded in Japan. It excludes the smallest 15% by market cap.

The Japanese stock market is performing well compared to the global market excluding the US. The 3-month and year-to-date November 5 total return gains for EWJ were 13.32% and 18.92%, respectively. The corresponding returns for the iShares MSCI All Countries ex US ETF, ACWX, were 9.97% and 17.18%.

Among the many other Japanese ETFs, we are watching the iShares JPX-Nikkei 400 ETF, JPXN, which since September 4, 2015, has tracked the JPX-Nikkei Index 400. This index selects Japanese companies based on measures of efficiency in the use of capital and profitability and other qualitative factors relating to governance and reporting standards. JPXN has AUM of $104.68 million. ETF.com gives JPXN a tradability score of 4 in a range of 1 to 5. Its performance this year is very close to that of EWJ, with a year-to-date total return of 18.73%. It will be interesting to see if, going forward, the qualitative factors underlying this ETF lead to outperformance.

Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio_________________________________________________________
Sources: Financial Times, OECD.org, Jibun Bank, Markit, ETF.com

 


 

Cumberland Advisors is pleased to announce that registration is now open for our annual conference, “Financial Markets and the Economy – Fourth Annual Financial Literacy Day”, at the University of South Florida Sarasota-Manatee (USFSM). We plan a deep dive into the Bond Market where we’ll examine the categories of debt and the influences on them including budget deficits and larger issues like central bank QE and its impacts on interest rates for this debt. We’re also featuring a discussion about Real Time Payments (RTP) to include Bitcoin, Libra, Venmo and other versions of electronic money. Our conference wraps with a Keynote Speech from Loretta Mester, President of the Federal Reserve Bank of Cleveland.

If you’re interested in learning more about financial markets and the economy (and escaping the snow for our friends in northern climes), please join us on Friday, February 14, 2020 in Sarasota, Florida. Information and registration here: https://www.interdependence.org/events/browse/fourth-annual-financial-literacy-day/


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Difficult Quarter for Eurozone Stocks

Eurozone equity markets have encountered significant headwinds in the second quarter of this year despite continued robust economic growth above estimated potential for most Eurozone economies.

Cumberland Advisors - Difficult Quarter for Eurozone Stocks

The continued strength of the Eurozone economies is emphasized in this month’s “OECD Economic Surveys: Euro Area.”[i] These economies have been growing since 2014. “GDP growth is expected to slow somewhat, but to remain strong by the standards of recent years,” the survey states. OECD projects Eurozone GDP to grow by 2.2% this year and 2.1% in 2019, compared with 2.5% in 2017. Factors driving this growth are the continuing expansion of the global economy, a very accommodative monetary policy, and a mildly expansionary fiscal policy. Among the reforms cited by the OECD that are needed to strengthen the resilience of these economies are a rapid resolution of the continuing nonperforming loan situation, a reduction of financial fragmentation across national borders, and improvement of the European fiscal framework.

The European Central Bank (ECB) also expressed a positive view of the Eurozone economies on June 21 as it presented its plan for scaling down its monthly quantitative easing bond purchases during the remainder of the year and concluding its Asset Purchase Program at year-end. The ECB indicated that its policy rates will remain at the present levels at least through the summer of 2019.

The HIS Flash Eurozone Purchasing Managers’ Index for June indicated that business activity regained some momentum after growth hit a one-and-a-half year low in May. The service sector was responsible for this improvement as manufacturing activity slowed further. Business expectations are depressed, with trade-war and political uncertainties cited as the biggest concerns.

Indeed, it is these concerns that have created the headwinds for equity markets during the second quarter. The worsening trade relations between the Eurozone and the US are a greater concern for Eurozone equity markets than for the US’s, as the Eurozone is more dependent on trade and on the maintenance of the rules-based international trading system. While Europe will respond in kind to trade restrictions imposed by the United States, its scope for doing so without harming itself are limited. If the trade war continues to escalate, the effects on the region will be dire.

Political developments in Europe also have created uncertainties that undermine investor confidence. The election of a populist government in Italy is seen as a threat to European institutions and increases the difficulty of reaching an agreement on an EU-wide solution to the immigration issue. While the election of the centrist Macron in France last year led to optimism that the populist tide had turned, populist, EU-sceptic parties have gained ground not only in Italy but also in Eastern Europe. Even in Germany, where Angela Merkel has been able to extend her leadership of the country, she is confronted with the difficult task of finding a position on migration that is acceptable to her coalition partner, the Bavarian CSU party, which is seeking to ward off competition from the right-wing populist AfD in regional elections in October. Polls indicate that immigration is the most pressing issue in the region and is a major driver of EU populism. An “immigration summit” of EU leaders last weekend was unable to make any progress.

Another source of political uncertainty is the negotiations on Brexit: Major issues remain unresolved, and time is running out.

It is not surprising, therefore, that Eurozone equity markets have experienced heavy going this quarter, despite the positive macroeconomic situation. Over the last 90 days through June 25th, the return for iShares MSCI Eurozone ETF, EZU, is -5.11%, which compares with a positive return of 2.22% for the SPDR S&P 500 ETF Trust, SPY. Within the Eurozone there is considerable variation in returns over this period, ranging from positive gains of 3.48% for the Global X MSCI Portugal ETF, PGAL, and 2.54% for the iShares MSCI Ireland ETF, EIRL, to large losses, with returns of -10.21% for the iShares MSCI Italy Capped ETF, EWI, and -12.53% for the iShares MSCI Austria Capped ETF, EWO. For the first and second largest economies, the iShares MSCI Germany ETF, EWG, returned -5.79%, while the iShares MSCI France ETF, EWQ, performed less badly at -2.65%. Trade tensions are likely to determine whether these markets are able to recover in the second half of the year.

Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio


[i] http://www.oecd.org/eco/surveys/economic-survey-european-union-and-euro-area.htm
Sources: OECD, HIS Markit, CNBC, Bloomberg, Goldman Sachs Economic Research

Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.