In a recent article written for the FT, RBA’s Richard Bernstein makes the case (again) that the Emerging Markets growth story is flawed if one stops to analyze the data.

“Profits data increasingly refute the widely held belief that the emerging markets offer the best growth. Approximately 60 per cent of EM companies reported negative earnings surprises for the fourth quarter of 2012. The comparable figure in the US was only 27 per cent. Earnings expectations for EM companies seem much too optimistic.

In addition, the projected earnings-per-share growth rate for US small-cap stocks is double that for EM stocks. Based on data from Bloomberg, the projected 12-month EPS growth rate for the S&P Small Cap 600 is 34 per cent, whereas the comparable number for the MSCI Emerging Markets universe is only 17 per cent. US domestic stocks currently offer better growth and are certainly under-owned.

US domestic stocks remain largely ignored despite the length and magnitude of their outperformance. The S&P Small Cap 600 Index has significantly outperformed the MSCI Emerging Market Index over various periods, yet it is the emerging markets that continue to command attention among investors and the financial media. Over the past five years, US small-cap shares have risen nearly 50 per cent, whereas investors in emerging markets have seen a small loss (49 per cent total return versus -0.1 per cent over the five years to April 30).

Investors generally accept that the global credit bubble is deflating, yet they continue to overweight credit-related asset classes. Emerging markets, commodities, gold, hedge funds, real estate and private equity performed well as the credit bubble expanded because they are all credit-sensitive assets. Their performance since the credit bubble began to deflate in 2008 has generally been inferior.

Investors seem to be waiting for these asset classes to come back, much as they spent a good portion of the early 2000s waiting for technology stocks to rebound. Meanwhile, a more exciting growth story has surfaced in an unexpected segment of the global equity markets.

The US stock market has outperformed emerging markets for more than five years, and that outperformance has been led by domestic stocks rather than by multinationals. A sea change within the global equity markets is well under way, but investors seem completely unaware.”

Source: FT

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5 Responses to Bernstein: “Data refute the widely held belief that emerging markets offer the best growth”

  1. Enki Ea says:


    Look into a new BCCI type bank but this time around, its operational in Brazil.

    The outfit in question is Banco Paulista and its controlled subsidiary broker/dealer SOCOPA.

    This little bank, owned by a very traditional “Paulistano” family (the Vidigal family) has turned itself into the go to bank for money laundering, black market currency, corrupt politicians accounts, etc.

    They are even taking deposits (turned into cash usually within 48 hours) from known terrorist groups, known drug dealers, arms dealers, pirated/contraband goods dealers, etc.

    ± USD 400 Million per month comes from the triple frontier of Brazil/Paraguay/Argentina and into Banco Paulista in São Paulo. From there, they cash this money on a weekly basis and deliver it to the owners “Casas de Câmbio” to keep on moving. The bank is charging between 3% and 5% to cash out moneys and 20% to launder moneys.

    The Bank also charges a 3% flat feet to accept hard cash deposits of any source.

    Now the real deal is the black market currency exchange (known in Brazil as Doleiros).

    The bank uses its license to purchase official US Dollars from the Brazilian Central Bank (to the tune of US$ 10 million per day) therefore at official exchange rates and than sells the  same dollars in the black market (via fraudulent forex contracts). The focal point of distribution for the hard cash (both dollars and reais) is SOCOPA’s main office at Rua Funchal, 129  - 5º floor in São Paulo, Brazil.

    The person in charge of handing the cash over there is Mrs. Maria José

    There are four main “culprits” in this criminal activity:

    Alvaro Augusto Vidigal
    Alvaro Augusto de Freitas Vidigal
    Marcelo Pereira
    Tarcísio Rodrigues

    If one keeps an eye out on any regular day, they will see politicians, businessmen, regular people, criminals, etc., all going into SOCOPA to get their packets of cash.

    The authorities in São Paulo don’t care or at least pretend the issue does not exist and the local media is nowadays almost like in Venezuela (no reports involving politicians).

    If this gets the media it deserves, it has the power to bring down some top figures in the Financial World of Brazil and also some heavyweights from the political arena as well. Let’s not forget known/wanted criminals. 

    This little bank is a true “Atomic Bomb.”

  2. ACO says:

    Bad analysis.

    - EMs and gold did remarkably well from 2009-2011. Oil has held its own until now and many producers are near peak prices.

    - How can he argue investors are unaware of the “seachange” shift to US companies with the US markets (including small caps) making new all-time highs week after week?

    - No consideration given to how the slowdown in the BRICs real economies will impact the performance of US stocks.

    - Profit growth among US companies has been largely driven by unsustainable trends – primarily through layoffs, cutting worker hours, benefit reductions, and other cost-cutting measures. Across the board revenue growth has been weak.

    Many strong EM companies are trading at or near all-time lows, mostly due to the fact that commodity producers are out of favor and suffering the impact of the Chinese slowdown. However, weak EM performance does not equate to a strong outlook for bloated US equities.

  3. Brazilian Bubble says:

    Responses to each of your comments:

    1. Bovespa is down by more than a third in dollar terms since early 2010.
    2. I think this was the mentality up to early this year… no one bought the “end of BRICS” story until early this year. Brazilians hedge funds have been buying US stocks for the last 3 months only… a little late to the game (which started in 2009!).
    3. Yes, BRICS slowdown will hit stocks, fundamentally, but investors are buying the US story despite that.
    4. Agree on profit growth through layoffs and etc, but the strengthening of the economy is the case for buying US stocks.

    China’s stock market has been flat for the last 10 years, even though the economy grew 4 folds. Brazilian stock market is joke: it falls even when all other EMs go up. Profit growth in Brazil is dismal… high costs is killing it.

  4. FRANK STEIN says:

    Agree with BB. BOVESPA will fall below 20K over 2-3 years. Brazil is at the end of a BOOM. There will be DOOM and years of GLOOM in Brazil as the credit bubbles deflate. US is at the end of GLOOM. BOOM will follow for several decades with improved balance of payments, shrinking deficits, increasing employment and strengthening dollar.

  5. ACO says:

    Thanks for your detailed response. I am a huge fan of your site and have shared your bearish outlook on Brazil since 2010.

    Here is where I fundamentally disagree with the article and your response:

    1. The general investing public does not continue to believe that EMs and Brazil are the growth engines in the world economy. To the contrary, sentiment levels with regards to the BRICS are at extreme lows right now. (How many positive articles have you read about Brazilian equities in the past week, month, etc?) Most people at this point are cognizant of the fact that liquidity is underpinning market performance in the US and Europe. Many of the US bulls believe that ZIRP, QE, and other stimulus measures have “saved” these economies and have set corporate earnings and the RE market on a continuous growth cycle. Moral hazard at its finest.

    2. Trend changes are inevitable. The SPX and the DAX are hovering around their all time highs, while the BVSP is 30% off peak. Brazil has cut back on its stimulus measures while the US, Europe, and Japan have continued to increase theirs. Currency devaluations have tended to precede export-led growth.

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