Barron's Cover

Bulls Gain Ground in Barron’s Fall Big Money Poll

America’s money managers see stocks rising as much as 7% through mid-2016, propelled by a growing economy. Why the Fed should hike son.

By Jack Willoughby   

Our latest survey finds 55% of managers bullish, and 16% bearish. Illustration: Scott Pollack for Barron’s
After a wild and crazy summer for U.S. stocks, marked by an 11% correction in August, Wall Street’s bulls are showing conviction again. Based on the findings of Barron’s latest Big Money poll, a biannual survey of professional investors, the pros expect stocks to rise by as much as 7% through the middle of 2016, propelled by a growing economy and gains in corporate profit.
The Big Money investors see fresh value in beaten-up energy stocks and financials, as well as dividend-paying blue chips. And they don’t expect a likely interest-rate hike—when it comes—to break the bull’s stride for long.

Fifty-five percent of survey respondents call themselves bullish or very bullish about the market’s prospects through next June, well above the 45% of bulls in our spring survey. Says Hank Smith, chief investment officer of Haverford Trust in Radnor, Pa., which oversees $6.5 billion: “What we are seeing is a normal correction in a bull market, a flushing out of excesses. It will provide a stronger foundation for the next leg up.”

The Standard & Poor’s 500 index has dropped 3% from its August peak, to a recent 2033, and trades for 17.2 times this year’s expected earnings and 15.7 times next year’s estimate. Only 16% of Big Money managers consider the market undervalued, while 30% say it is overvalued.

The recent reversal doesn’t bother Ted Bridges of Bridges Investment Management in Omaha, Neb., with assets of $1.8 billion. “The lower prices go, the better valuation gets, and the more constructive we become,” he says. “A correction like this presents a great opportunity to position capital in good companies to hold for the long term.”

Robert Maynard, chief investment officer of the $15.1 billion Public Employee Retirement System of Idaho, says equity markets look “fully valued to slightly overvalued, but not stunningly so.” Maynard plans to stick with his long-term allocation to stocks, and expects the U.S. market to produce a total return of about 9% a year, on average, with real growth contributing 2%; inflation, 3%; dividends, 2%; and share buybacks, 2%.

He looks for the Dow Jones Industrial Average to rally to 18,000 by mid-2016, up from about 17,216 last week, and the S&P 500 to climb to 2041.

BASED ON THEIR MEAN market forecasts, the Big Money bulls see the Dow ending the year at 17,140. That’s below Friday’s close, but well above where the market traded in mid-September, when the survey was e-mailed to participants. The bulls expect the industrial average to reach 17,965 by the middle of next year, for a total gain of 4.4% from here.

They look for the S&P to tack on 6% by next June, to 2147, while the Nasdaq Composite, fueled by highflying technology shares, could gain 7%. The Dow peaked in May at an all-time high of 18,351, and the S&P, at a high of 2135. The Nasdaq crested in July at 5232.

An excess of negative sentiment has made some money managers even more sanguine about the future. “A lot of worry and angst is already in the market,” says Norman Conley, CEO and chief investment officer of St. Louis–based JAG Capital Management, which runs $1.2 billion.

“With the exception of the energy sector, underlying fundamentals support higher stock prices.”

Conley says investors have given short shrift to the latent strength in the U.S. economy, and the impact of lower energy prices on consumer spending. For the past six months, he notes, bonds have outperformed stocks. Now, “equities are set up to do better.” Conley predicts that the Dow will trade up to 19,700 by next June.

Joe Gilbert, a portfolio manager at Asset Management in Rocky River, Ohio, with $5 billion under management, is the most bullish participant in our survey. He expects the industrials to reach 20,000 by mid-2016. “There is always a negative case, but it is already in the market,” he says. “What isn’t being priced in are potential positive surprises.”
Gilbert says he’s buying transportation companies such as railroad operator Kansas City Southern (ticker: KSU), which he thinks could become a takeover target. In addition to serving the Midwest and Southeast, the carrier operates rail lines connecting Mexican manufacturing centers and ports with the U.S. The shares are down 31%, to $87, from a 52-week high, and trade for 17 times next year’s expected earnings.
In our spring survey, half of the Big Money managers were neutral on the market—a record neutral reading. Not anymore: The fence-sitter ranks have thinned to 29% since stocks’ summer swoon, which began when China unexpectedly devalued its currency after its economy slowed. Stocks have since recovered about half of their August losses, but volatility has spiked, and options activity suggests it will stay elevated.
If professional investors see more reason for optimism this fall, not to mention more bargains, that is hardly the case among their clients, who were deeply unnerved by the market’s sudden selloff. Big Money respondents report that 76% of their clients are neutral on U.S. equities today, and only 12% are bullish.
BARRON’S CONDUCTS THE BIG MONEY POLL in the spring and fall, with the aid of Beta Research in Syosset, N.Y. The latest survey drew responses from 138 money managers across the country, representing public pension funds, large investment firms, and smaller investment boutiques. The market was particularly roiled during the survey period, with stocks again falling sharply at the end of September before snapping higher. “We couldn’t tell until later if the bottom had been fully tested,” says Stephen Drexler, a portfolio manager with Wells Fargo Advisors in Colorado Springs, Colo., with $300 million in separate accounts. “We’re convinced now.”
Drexler detects a newfound vigor in the market, and predicts that the Dow will rally to 18,500, and the S&P 500, to 2175, by next June. He sees the Nasdaq advancing to 5400 in the same span. “People have grown way too pessimistic,” he says. “We suffer from PTMD, or post-traumatic market disorientation. We’re allowing short-term shocks to cloud our judgment. This may turn out to be the longest bull market by duration.”

Almost two-thirds of Big Money managers consider equities today’s most attractive asset class.

Cash and commodities are tied at a distant second, each with 9% of their votes. Sixty-one percent expect equities to outperform other asset classes in the next 12 months, although cash is No. 2, favored by 11% of respondents.

More than half of poll participants think bonds hold the greatest investment risk, with yields having fallen steadily for more than 30 years, to zero on short-term government debt. Some 38% of managers expect fixed income to be the worst performer in the next 12 months, a period in which the Federal Reserve is expected to lift its interest-rate target for the first time in nine years. Among fixed-income categories, the Big Money crowd is most bearish on non-U.S. bonds, followed by U.S. Treasuries and U.S. corporates.

The U.S. will outperform other major markets in the next 12 months and five years, according to many Big Money pros. In the near term, 60% expect China to be the worst performer. Japan could hold that dubious distinction over a longer span.

As for other asset classes, 63% of managers like the prospects for real estate. Only 35% favor commodities, even though many commodities are trading near multiyear lows. Gold doesn’t glitter much for this crowd, notwithstanding a modest rally since July that has carried the price up 8%, to $1,180 an ounce. More than 70% of Big Money managers say they are bearish on gold. Their mean price prediction for the bullion as of next June 30: $1,131 an ounce.
While the managers are roughly split on the possibility that stocks will rise 10% in the next 12 months, only a fourth entertain the notion that stocks could fall by 10%. Rising corporate profits would be the No. 1 accelerant for stock prices, followed by stronger economic growth beyond U.S. shores.

More than 80% of poll respondents see profits climbing in the coming year, but they disagree about how high they will go. Fifty-two percent expect earnings to rise by only 1% to 5%, but 44% look for loftier gains of 6% to 10%. The managers are split, as well, on whether the market’s price/earnings ratio will expand.

Forty percent see an increase, 41% expect no change, and 19% look for the P/E on the S&P 500 to fall.

The good news, to some, is that current stock multiples don’t reflect much exuberance. “I can’t recall a bull run ending with a P/E of 15,” says Tim Cummins, chief investment officer of Seattle’s Sonata Capital, which oversees $200 million. “Where is all the unbridled enthusiasm?”

JUST AS THE MARKET’S SELLOFF inspired bargain-hunting among some investors, the continued turmoil has nudged others out of the neutral camp into the bears’ lair. Sixteen percent of the Big Money managers claim to be bears in our latest survey, more than triple the percentage last spring, and higher than last fall’s 10%.

On average, the bears see the Dow ending this year at 15,856, before falling to 15,233 by next June, for a total loss of 12% from recent levels. They expect the S&P to slide 11% to 1808, by the middle of 2016, and the Nasdaq to tumble 11% to 4372.

Nearly a third of the Big Money managers say a weakening economy or recession poses the greatest threat to the market, while about a quarter flag earnings disappointments. Another 21% cite continued turmoil in China’s economy and stock market as the biggest risk facing stocks. Christian Picot, a partner at Odyssey Investment Management in New York, with $65 million in assets, predicts that problems will come from “a severe rout in emerging markets, which are in trouble.”

A global recession is “a very real possibility in 2016,” says Andrew Wang, senior vice president of Runnymede Capital Management in Mendham, N.J., with assets of $200 million.

Wang thinks the Dow could fall as low as 15,000 by the middle of next year, and cites deteriorating economic data in emerging markets, Europe, and China, and even in the U.S. “Prices for copper, oil, agricultural products, metals, and minerals have fallen by 20% to 50% in the past six to 12 months,” he says.

“We are seeing rising layoffs, on top of layoffs in the energy business. We’re beginning to see an impact on restaurant sales, health-care spending, and financial services. Investors should focus on asset protection and capital preservation.”

Debt is the issue troubling Ernest L. “El” Jahncke the most. “The entire world seems awash in debt of every kind,” says Jahncke, a specialist in real estate finance at Seattle-based Washington Capital Management, with $3.6 billion in assets. “It is getting to the point where it might be unsupportable.

The world economy has become so addicted to debt that it can’t handle higher interest rates.”

Jahncke predicts the Dow could fall as low as 13,400 in coming months. He advises U.S. investors to stick close to home, and favors tech stocks with decent dividends, like Apple (AAPL) and Microsoft (MSFT).

Apple yields 1.87% and Microsoft, 3.03%.

THE U.S. ECONOMY ROSE by a mere 0.6% in this year’s first quarter and expanded by 3.9% in the second, for an average annualized gain of 2.25%. Seventy percent of Big Money managers expect gross domestic product to grow by 2.5% or more in the next 12 months, with 26% estimating the economy will expand by 3% or more. So far, the economy is recovering at a slower pace than in past recoveries, but Mark Livesay, a portfolio manager at Capital Management in Glen Allen, Va., with $400 million in assets, expects an upside surprise. He predicts U.S. GDP will expand by 4% in the next year, driven by more robust consumer spending.

The managers are mixed in their view of global growth. Only 44% expect the global economy to strengthen in the coming year, down from 68% in the spring survey. Thirty percent see no change, and a fourth expect conditions to weaken in many markets.
More than 80% of Big Money managers look for China to devalue its currency further against the dollar in the next 12 months, making its exports more competitive. As for the greenback itself, 57% see the dollar appreciating against the euro, a sharp decline from last spring, while 73% see further appreciation against the yen.

Ulf Lindahl, CEO and chief investment officer of A.G. Bisset, a $1.2 billion currency-management firm in Norwalk, Conn., maintains that the dollar will reverse course and drop in value against other major currencies. “We have been bearish on the U.S. dollar since March,” he says. “We see a 15-year cycle about to turn. If the dollar goes higher it will become disastrous for emerging-market countries.”

Capital flows into emerging markets could reverse, making it harder for these countries to service dollar-denominated debt commitments. Lindahl has low expectations for U.S. stocks; he sees the S&P 500 falling to 1625 in the next eight months.

HANGING OVER THE MARKET this year is the prospect of higher interest rates, which so far have failed to materialize. The Federal Reserve opted in September to leave its federal-funds rate target unchanged at 0% to 0.25%, given the cloudy outlook overseas, and the U.S. Treasury sold three-month Treasury bills last Tuesday at a yield of zero. Meanwhile the 10-year Treasury yield has fallen to 2.023% from a hardly generous 2.156% a year ago.

Most Big Money respondents disapprove of the Fed’s decision to stand pat last month, especially after the central bank telegraphed that it might finally start lifting rates off the mat. “The Fed had the market prepared for a rate hike, and the data show a significant tightening of the labor market,” says Charles Lieberman, chief investment officer of Advisors Capital Management in Ridgewood, N.J., which oversees $1.3 billion.

Livesay, of Capital Management, says the Fed “lost credibility when it stated conditions were essentially met and then delayed due to factors outside the U.S.”

Most managers expect Fed Chair Janet Yellen to lift rates after the Fed’s December meeting or in next year’s first quarter, even if, as one noted in written comments, a 25-basis-point (0.25%) increase “is not a real raise.” Seventy-four percent of managers predict that the 10-year bond will yield 2.5% or less a year from now. Nearly half expect their fixed-income portfolios to produce negative returns in the next 12 months.

While Bridges, the Omaha-based money manager, says the Fed’s zero-interest-rate policy probably was necessary to lift the U.S. out of the financial crisis and recession, he thinks the Fed is sending the wrong message now. “It is sending a negative signal about the strength of the U.S. economy,” he says.

David Kelly, chief global strategist for JPMorgan Funds, argues that the Fed shouldn’t worry about the negative effect of raising interest rates, because of the attendant boost in savers’ incomes. He believes that Yellen & Co. are listening to too many voices overseas, including those at the International Monetary Fund and World Bank. “The plural of focus is blur,” he quips, adding that “there is something to be said for the beneficial effects that normal interest rates will have in allocating capital. Ultimately, it will make the economy run better.”

Kelly looks for the market’s key indexes to finish the year slightly above current levels, but he expects the Dow to be trading at 17,900 and the S&P at 2130 by next June. “If you remove the uncertainty [of an interest-rate hike], the market will go up,” he says. “It is hard to see the U.S. economy as sick when the consumer is so healthy.”

It is always possible that market forces will lift rates ahead of any move by the Fed. That’s the contention of Greg Melvin, chief investment officer at Pittsburgh-based C.S. McKee, a $10 billion-in-assets manager. “You just can’t have zero interest rates for long without messing with the metrics of commercial activity,” he says. “It amounts to a wealth tax on the middle class, who have to liquidate assets to derive income.”

AMONG INDUSTRY SECTORS, the Big Money pros favor energy, financials, tech, and health care. Yet, about 20% think energy will be the weakest performer in the next 12 months. Our respondents see crude-oil prices rising 11% in the next 12 months, to $52.30 a barrel, from last week’s $47.72. West Texas Intermediate crude last sold above $50 a barrel in mid-July, on its way to a low of $38.24.

Drexler, of Wells Fargo Advisors, likes consumer-discretionary stocks, and says they offer many ways to play the expected strength of the U.S. consumer. “The housing market has recovered,” he says. “We’re selling more cars than ever, and all the industries around these industries should do well.”

The managers’ favorite stocks include Apple, Gilead Sciences (GILD), Procter & Gamble (PG), and Bank of America (BAC), as well as social-media leaders Facebook (FB) and Twitter (TWTR). Shares of Cincinnati-based P&G have fallen 20% this year, to a recent $75, but Marc Dion, a portfolio manager at Morgan Dempsey Capital Management in Milwaukee, with $375 million in assets, lauds the company’s strong balance sheet and cash-flow generation. A new CEO takes charge next month, while an ongoing restructuring program “should turn P&G into a smaller, more focused, and faster-growing company,” Dion says.

Smith, of Haverford Trust, calls Apple his top pick. The stock is trading at about $110, or a mere 12 times 2015 estimated earnings of $9.76 a share, and is “cheap by any metric,” he says. A large cash position gives Apple the flexibility to either buy back more shares or raise its dividend. The risk in the stock is Apple’s ability to extend its hit parade of must-have iPhones and computers, and maintain its stellar growth rate.

Reflecting Wall Street’s diversity of opinion, stocks such as Apple, Facebook, and Twitter also are among those the Big Money men and women consider most overvalued. Topping the list is Tesla Motors (TSLA), which trades for an eye-popping 102 times next year’s expected earnings, followed by (AMZN) and Netflix (NFLX).

Michael Farr, president of Farr, Miller & Washington, in Washington, D.C., with assets of $1.1 billion, suggests that ultralow interest rates are responsible, in part, for sky-high valuations in certain speculative corners of the market. When the Fed finally raises interest rates, the price of the “Netflix stocks” will fall and money will be redirected to safer stocks such as Johnson & Johnson(JNJ), Farr says.

“Until investors are shown that risk comes with consequences, we’ll have people making inappropriate bets,” says Farr. “Fred and Ethel should not be buying Netflix or Tesla.”

JUST AS THE FED’S ACTIONS, or lack thereof, weigh on investors’ decisions, the political backdrop and presidential race are commanding Wall Street’s attention. The Big Money managers as a group have long leaned Republican, but they’ve got plenty of views about Democrats, too. In our fall survey, 57% indicated they expect Hillary Clinton to be the Democrats’ candidate for president next year, although 43% think Vice President Joe Biden will edge her out.

Among the GOP contenders, 30% of managers expect Jeb Bush to head the ticket, the same percentage who think Marco Rubio will get the party’s nod. Another 15% figure that John Kasich will be the party’s candidate. As for Donald Trump, just 11% of poll respondents think he stands a chance.

Two-thirds of Big Money managers see the Republicans taking the White House in next year’s race.

Asked to pick their own top choice, 22% of respondents are going with Rubio and 20% with Bush.

Regardless of which party is in control, professional investors cite tax reform as Washington’s most urgent priority, followed by reform of entitlement spending and a reduction in federal spending.

We’ll check back with the Big Money crowd next spring, to see how their market forecasts and political bets are playing out. 

European banks

Banking and nothingness

Europe’s dithering banks are losing ground to their decisive American rivals

YOU wait ages for a European bank to send a clear signal on its future strategy and then it gives two in as many days—saying seemingly opposite things. On October 11th the chairman of Barclays hinted its investment-banking unit might be flogged to a rival for want of scale.

Investors intrigued by the prospect of a simpler Barclays focused on dull-but-reliable retail banking had but a few hours to ponder the prospect. By the next day reports emerged that the same chairman had plumped for a former J.P. Morgan investment banker, Jes Staley, to be the bank’s next boss.

Seven years after the height of the financial crisis, Europe’s large banks still behave as if they are in the thick of the storm. Plans for radical restructurings are shelved before they are even implemented, often accompanied by management defenestrations—Barclays is one of four big European banks with new leaders. And they have dithered on the most basic questions, for example on how much capital they need or whether to scale back misfiring investment-banking arms.

European indecisiveness stands in sharp contrast to America’s large banks, which restructured more quickly. Returns are below pre-crisis levels, but their balance-sheets are stronger and management teams bedded in. European banks are still weighed down by non-core units and dud loans; America’s banks have moved on.

Investors have noticed. Most big European banks, including Deutsche Bank and HSBC, trade at a discount to tangible book value: in theory, they would be better off wound up and money returned to shareholders. Bar Citi, America’s largest banks trade at a premium to book value.

Shareholder returns for big American and European banks used to track each other; now a chasm has opened up (see chart 1).

In investment banking, Wall Street is relentlessly gaining market share at Europeans’ expense (see chart 2). The business of helping companies raise money on capital markets, trading bonds and generally shifting money around is one that European banks are not keen to give up. But fund-raising clients are deserting the likes of Barclays and Credit Suisse for Goldman Sachs and J.P. Morgan.

Many factors help explain the disarray of European banks. Profits across all their lines of business have been hit by years of anaemic economic growth; America’s banks have been lending in a more buoyant environment. Interest rates in the euro zone are set to stay lower for longer, making it harder to generate decent net interest margins from lending. Europe’s banking market is fragmented and includes politically controlled lenders, such as Landesbanken in Germany, which sap profits for everyone.

European bank bosses also blame changing regulations for their vacillating strategies. They have had a tougher job adapting to new global rules, which have moved them towards an American model. The introduction of a leverage ratio, which limits the amount banks can borrow in order to make loans, is a transatlantic import. It punishes big banks holding relatively safe assets such as mortgages or government bonds—the essence of European banking. By contrast, American banks act as conduits to capital markets and hold relatively few mortgages on their balance-sheets, thanks partly to government agencies like Fannie Mae and Freddie Mac.

Some of the finer print of regulation in Europe has indeed been a long time coming. A new euro-zone banking regulator—a direct consequence of the euro crisis—is only now getting into its stride, nearly a year after it was created. Swiss rules on leverage and British ones on “ringfencing” retail arms, both out this week, have taken ages to emerge.

But Europe’s bankers have also been in denial, confident their political masters would sooner row back on regulation than force them to retrench. Having dithered, they now have to make up ground, most obviously by further slimming down their investment banks. These guzzle capital, and have a knack for attracting multi-billion dollar fines to boot. UBS, a Swiss outfit that throttled its investment bank, is a darling among both regulators and investors.

Rivals unready to go down the same road—not every bank has a lucrative wealth-management franchise like UBS’s to fall back on, after all—stress that investment banks are needed to help firms and governments raise capital. Policymakers want to lean less on banks and more on capital markets.

But at current rates, bankers warn, only Wall Street titans will be able to help Europe’s companies find investors or advise them on mergers. Frédéric Oudéa, the boss of Société Générale, a French bank, argued in a Financial Times article this week that having a Europe-based investment bank was a matter of “economic sovereignty”.

That is obviously self-serving. The prosaic truth is that American investment bankers are more efficient. A large part of that is home-turf advantage: half of all global investment-banking revenues are generated in America. Size also matters in banking: market-share gains are going to the bigger firms (see chart 3). Europe’s investment banks tend to be smaller.

But American investment banks also have lower costs, having trimmed staff sooner. Around 70% of European investment banks’ income is soaked up by staff costs, about 15 percentage points higher than in America. That, at least, is starting to be addressed. Deutsche Bank’s new boss, John Cryan, has a reputation as a ruthless cost-slasher and is expected to announce massive job cuts soon.

European banks also look more likely to catch up on capital, where they have been deficient compared with their American rivals. Tidjane Thiam, the new boss of Credit Suisse, is expected to raise billions from shareholders. Deutsche Bank is shedding assets, notably its stake in Postbank, an underperforming German retail lender. It has also warned it may forgo a dividend this year for the first time in decades. French banks lag in this regard.

“In any other industry with excess capacity, you’d have consolidation,” says Huw van Steenis, an analyst at Morgan Stanley. Merging two big beasts, or at least fusing their investment banks, would be a way to cut costs. The euro zone’s new regulatory bodies are not opposed: cross-border mergers would be a show of European financial-market integration. But post-crisis rules designed to rein in “too big to fail” banks mean that larger firms attract even higher capital ratios, crimping returns.

As for clients, the need for a European banking champion is hard to see. Excess banking capacity, if anything, serves European businesses well: they pay much less in fees than their American peers for things like listing shares on a stockmarket. Few seem to mind tapping a Goldman Sachs or Merrill Lynch for operations that require global reach. That may annoy European bankers, but is hardly a reason to mollycoddle them. If their investment banks cannot pay their way under the current rules, it is the banks that must change, not the regulations.

Emerging Latin America's Economies And Their Development, Part II

Inflation and unemployment statistics have improved.
There is variety in how GDP per person has changed.
Stock markets show similar behavior, especially during crisis periods. Thank you goes to large and homogeneous institutional investors from developed countries.

This article is Part II of three that covers my research to study the development of Latin America from the year 2000 to current day. (See Part I here).

I have kept the text in its original form, even the notes for references are there, so readers who are truly interested can go and find that source material here. This information is only one-year old, so it is still quite accurate and hopefully interesting reading for everyone. I have added new comments to update the situation if seen necessary.


In the graph below, it can be seen how annual unemployment percentage and annual inflation percentage have changed from 2000 to 2013. Datastream provided the unemployment rates, annual inflation was by the World Bank, but for Chile (year 2000), Trading Economics had to be used. They are presented together, because as unemployment decreases, it can be expected to result in larger wages, and as spending increases, also inflation rises. Especially inflation numbers are interesting, because if companies and individuals cannot trust prices, then they will have less reason, less motivation to invest or do anything that would even improve their own future. Therefore, controlled inflation is important for any economy to grow on a sustainable basis.

(click to enlarge)
Figure 5. Inflation and unemployment, 2000 and 2013 compared

Update: Notable difference to the situation one year ago is that, while USA and Canada continue with a very low inflation with Mexico (going lower), other Latin American countries have higher inflation rates compared to one year.

It can be quickly seen that 2013 values for all countries except for Argentina are very close together.

Countries have moved considerably closer together towards low inflation and also, low unemployment percentages. Clear change can be seen when comparing values from 2000 to 2013.

Negative effect of this positive situation is that low unemployment is expected to lead to growing wages and higher inflation if neither the population nor the immigration manages to provide enough workers for the growing industries.

This again might lead to unemployment and lower inflation as outsourced jobs move to cheaper areas (and jobs that can be outsourced from their home country in question). I would not expect this to happen quickly as emerging markets are generally far from the price level of developed economies, but for long-term planning, it must be remembered what special skill sets certain areas possess so that rising prices would not make companies close their local offices, such as mining companies closing mines when miners' wages are above revenues from the ore they are hired to mine.

With Argentina, it must be noted that some sources, at least some individual economists, expect its inflation to be well over thirty percent in 2014 (BBC 2014b). It is also stated that government of Argentina has been manipulating inflation statistics for years (The Economist 2014d).

Castellano, Aracena and Smearman published a report in January 2014 concerning Argentina, where they state that, since 2010 inflation has been over twenty percent, it was more than twenty five percent in 2013 and is forecasted to be over thirty percent in 2014 and 2015 (Castellano, Aracena and Smearman 2014: 1).

Update: Inflation in Argentina continues high, but is reporting finally becoming more truthful? News: 40% inflation?; Example how prices have changed; Inflation reporting becoming truthful?

Now, let's move on to productivity and compare how low unemployment is related to it. Low unemployment can lead to rising wages as competition for employees is tougher. Rising wages then lead to lower productivity (plus, to missed growth, as there are not enough workers available). Also, low unemployment doesn't guarantee that workers are effectively employed. To look into this, Table 1. below shows annual GDP numbers per person employed based on the numbers by the World Bank.

What can first be seen is that top three countries with lowest unemployment (Canada, USA and Chile) are also top three countries in terms of productivity per person employed in 2012. If we look at Colombia and Peru, we see that from 2000 till 2012 productivity in Peru has grown 45.4%, and in Colombia, 21.7%. Of course, these two started from a very low GDP. Brazil on the other hand has had only very minor growth, but having large population means a lot in this case.

Update: Latest unemployment statistics show that most countries are quite close to each other, between 6 and 8 percent of the population being unemployed (according to

Interesting details are that in Brazil unemployment has jumped from being close to 4% to close to 8%, and Mexico has the lowest unemployment. Luckily, Mexico has a large young population that is entering the workforce.

Table 1. GDP per person employed

What can also be seen, somewhat surprisingly, is that in Argentina, productivity has grown a similar amount as other countries. Canada with Mexico had the slowest growth, percentage wise. With Canada, this is understandable, as developed countries can find it more difficult to grow fast, but when compared to USA, Canada is far behind. Mexico's slow growth is surprising. Perhaps this is because developed countries merely use Mexico as a cheap labour provider, and this doesn't improve the status of Mexico's population, since free trade among non-equal countries is a perpetual exchange of technological products and commodities/natural resources/cheap labour. Therefore, there is no real development of Mexico due to its trade with the developed countries, as there is no stimulus.

Of course, it must be remembered that Mexico, due to its large population, has the fourth largest GDP among these eight countries, and thanks to its large young population, it also has plenty of future workforce that is still being educated. More people will equal more output, even if GDP per person stays the same. Of course, best results are achieved by having growing population and also rapid improvements in productivity. Those countries that are not as fortunate as Mexico to have a growing population with plenty of young, their mission is to increase workers' productivity. Simple means for this are improved infrastructure and healthcare.

Credit Rating

To give an idea of credit ratings of these countries, I am using a model created by Trading Economics. It takes into account the average credit rating given to the country by different rating agencies. It also takes note of multiple economic indicators such as exchange rates, government bond yields and commodity prices. Averaging these ratings guarantees that one credit rating agency is not able to have a great influence and manipulation to the final number.

Maximum number a country can get is 100, and the higher the number, the better the country's credit credibility is.

Ratings from largest to smallest: Canada 98.06; USA 96.86; Chile 76.83; Mexico 55.85; Peru 53.24; Brazil 50.73; Colombia 49.65; and Argentina 25 (Trading Economics, Rating). There are no real surprises to be seen. The most developed countries, USA and Canada, are at the top, Argentina is at the bottom, and other five Latin American countries are in the middle being quite close to each other. Based on the evidence already presented, I believe Chile could be rated better than it currently is, due to its long stability and the strong growth it has presented. Peru can be expected to be the next country that manages to separate itself from the group if its growth continues, and therefore, it manages to gain more trust from the international community. Brazil and Argentina might be experiencing lower ratings in the future due to Brazil's small GDP growth rate and Argentina's default situation.

Update: No surprise there. Brazil's rating today is 41 and Argentina's rating is 20. Other countries are close to previous numbers or a bit better.

Foreign Exchange Reserves

Foreign exchange reserves are monetary reserves that are gained by international trade and held by the central bank of a country. It can use them to affect the value of its currency if it so decides. Table below shows the amount of reserves per country per every even year, as was reported by the World Bank. What stands out is Argentina's weak growth and current negative development concerning its reserves. Also, it can be noted that the USA, Brazil and Mexico have grown their reserves at a much faster pace than rest of the countries while Canada's reserves are on the same level as Peru's.

The message behind this table is relatively important. Even though some countries can present better annual GDP growth percentages or lower government debt figures, foreign exchange reserves hint what countries are the powerhouses of international trade among these eight countries. Top three are clear since USA, Brazil and Mexico are far ahead. Canada's low number, especially since it is close to other emerging markets, is surprising compared to what would be expected. This reminds us that even though Canada is geographically a large country, its population is one tenth of that of the USA, and it does not possess similar economic power.

Table 2. Total reserves in billions of USD
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Stock Market Development and Correlation

Here, I look at the development of stock markets to understand how these markets have changed during this time period. With emerging markets, it is especially interesting. We also see if these markets behave in a similar fashion. Comparison of development of countries' stock markets is done by using quarterly index values. Values are adjusted so that all indexes start from one to make comparison of growth easier. This does not affect how the indexes have behaved later. Numbers on the left side then show how many times market index has multiplied from 2,000 till the first quarter of 2014. Colombia's data starts from third quarter of 2001 as there was no earlier index data available.

This information is presented in two graphs because large growth of few markets would make more stable markets like USA and Canada seem absolutely flat. Mexico (currently 5.7) is a good example. Out of North American countries, it has grown much more than USA and Canada have, but when compared to Colombia (14.1 currently) and Peru (13.3 at best during 2012 Q1) and to the current situation of Argentina (11.6), Mexico's growth looks small.

It can be seen that certain markets have experienced much faster growth. One likely reason for this is that emerging markets have been undervalued, and growth is strong as more international investors join. Seems that some markets have cooled down lately while some have continued upwards. Since international demand is the main fuel for these economies, it is impossible to say for sure how their future will be. Nevertheless, it will be an interesting one.

Figures, which are based on index data provided by Datastream, show that there is a clear correlation between all these markets at least during the financial crisis period. Financial crisis period 2007-2009 shows all countries' stock markets topping around the same time, then they all reach their bottom during first quarter of 2009, and from then, their direction is upwards.

Argentina, Mexico, Canada and USA are the ones to fall closest to their starting value. Peru seemingly had the largest drop, but it also recovered quickly.

Lately, almost all indices have had quite similar slowing-down phase or even negative growth. Surprising change in Argentina's index might be due to the markets believing that the country's situation is improving (Bloomberg 2013), although evidence shown here contradicts that expectation. Perhaps some investors are trying to battle inflation by investing into stocks, maybe because stocks are a commodity that can more easily adjust to inflation. Also, certain companies can perhaps be expected to be able to keep their prices well adjusted for inflation, though with such high inflation, as suspected, it can be extremely difficult.

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Figure 6. Stock markets

Update: One thing to note is, that because data starts from the year 2000, it is very flat for USA and Canada due to the IT bubble being strong then and later numbers are compared to that number. In recent news, all indices have lately either gone a bit down or seem flat compared to the situation a year ago. Brazil and Peru are the saddest examples, as their markets have slowly gone downwards for years.

As stated, it can be seen that all markets take a dive at the same time which tells us that there is some level of correlation between these markets. Outside that time frame, correlation seems to be weaker.

Studies by Diamandis (2009), Lahrech and Sylwester (2011), and Galvão de Barba and Ceretta (2011) all find some level of integration between the US and four Latin American nations (Argentina, Brazil, Chile and Mexico). Panayiotis states by studying 1988-2006 period that these markets are partially integrated (Panayiotis 2009: 28). Lahrech and Sylwester look into 1998-2004 time frame, but go longer in their statements by saying that co-movement has increased among these countries (except for Chile), therefore equity market instabilities in the US are more likely to be seen in those countries as well (Lahrech & Sylwester 2011: 1356).

Galvão de Barba and Ceretta look at a more recent period, 2003-2010. They find that relationship between Argentina, Brazil and the US has over time become more integrated, but Chile's and Mexico's relationship with the US did not change. Responses found are clear during the financial crisis period, but more vague during rest of the sample. They find no evidence of integration among the Latin American markets themselves. They show responses to the US stock market, but these responses are not homogeneous. Therefore, an international investor, from the point of view of international diversification, should not expect these countries to behave in the same way. For example, Chile's stock market does not seem to respond to Latin American or North American shocks. Brazil and Argentina are the ones that seem to be more vulnerable to international equity market shocks and that could be due to growth of foreign investments in their countries. (Galvão de Barba & Ceretta 2011: 142).