The recent and potentially ongoing drop in global stock markets has reminded international investors that the global economy is still on shaky footing. The nature of the decline, fast and with heavy trading volume, is reminiscent of the crisis period in 2008, leading many investors to consider alternatives to equities.
Following years of appreciation, emerging market currencies remained strong during the recent equity selloff. If the US Federal Reserve institutes a third round of quantitative easing, expect further appreciation of commodity currencies such as the Brazilian Real. As Barron's notes, the resilience of the Real during a period of risk aversion is "one sign or the newfound respect being paid to emerging markets."
And looking back at the past several years, emerging economies sustained healthy growth despite the credit crisis. Turning our eyes to the future, emerging markets appear likely to outperform developed economies in Europe and North America for many years to come.
For one thing, countries like China and Brazil have the capacity to stimulate economic growth with public domestic spending, something lacking in Europe and the United States. Moreover, to maintain healthy GDP growth, these countries must continue to develop infrastructure at a rapid rate. Morgan Stanley estimates that Brazil should raise infrastructure spending from 2% to 4% of GDP to optimize growth.
For international investors, infrastructure and related investments provide the safest and most lucrative investment environments at a time when the global landscape appears questionable.
In Brazil and other developing economies, the energy, materials and commodity sectors remain promising. For instance, the mining sector:
Surging investment in Brazil's mining sector will help the country to double iron ore output by 2015 and triple copper production in the same period, the head of Brazil's mining institute, Ibram, said Monday. Ibram expects Brazil's iron ore output to more than double to 772 million tonnes by 2015, from 372 million tonnes of the steel ingredient produced in 2010. That is well above the mining ministry's estimate for 585 million tonnes by 2015.
Investment is expected to quicken in the 2011-2015 period to $68.5 billion compared with the $62 billion in investments in the previous forecast for the 2010-2014 period, despite a shaky global economic outlook. Ibram's president, Paulo Camillo Penna, said the world market would easily absorb the extra output.
"Even with the slowing down of the economy, the (iron ore) supply is well below the demand that exists around the world," he told Reuters at Ibram's Brasilia headquarters. "Developing countries like China and others have sustained this strong demand," he said. He said he expected iron ore prices to stay above $150 a tonne for up to five years despite anticipated larger supplies that would be available by then.
Meanwhile, recent offshore oil discoveries mean years of related infrastructure development, as exemplified by the Petrobras refinery currently under construction in Pecém, Ceará.
Under Brazil's Accelerated Growth Program (Programa de Aceleração de Crescimento, PAC), approximately US$800 billion will be spent on infrastructure between 2008 and 2013. While half will go to develop the country's energy sector, large-scale funding will be allocated to transportation and the Minha Casa Minha Vida social housing program as well.
Brazilian real estate promises to be a primary beneficiary of infrastructure spending, particularly in areas adjacent to large developments. Real estate in Brazil is also accessible to international investors, providing an opportunity to diversify holdings as a hedge against potential currency devaluation in the United States and Europe.
In the northeastern state of Ceará in Brazil, the federal government is dedicating massive funds toward the port expansion at Pecém, with complimentary investments by Petrobras, Vale and numerous other large corporations in the energy and materials sectors. Ceará is also benefitting from tourism infrastructure development in advance of the 2014 World Cup and 2016 Olympics. The money is dedicated, and construction is underway. With over a hundred thousand new jobs coming to the port area, the time for investors to enter the market is now.
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