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Emerging market update





In the past 8 years, the Brazilian stock market, when measured in dollars, has risen almost 20-fold. This is simply breathtaking. Of course, a lot of that rise was a recovery from the collapse in the early 2000s (which in turn was precipitated by a super-strong dollar, collapsing commodity prices, and Argentina abandoning its dollar peg), but still, you'd have to say that Brazil is on fire. Its currency has been steadily appreciating vs. the dollar since late 2002, which has to be an all-time record for any Latin currency to my knowledge.

And since I'm in S. Africa at the moment, I'll mention that the rand has been strong against the dollar since late 2001, rising from 12 to 7.25 today. The press here says the rand is "overvalued," but I would note that wine and food are a terrific bargain. We had lunch at a scenic winery restaurant in the Stellenbosch region (S. Africa's Napa/Sonoma), and most of the wine on the list costs a mere $3 per glass, and it can hold its own against most of its California counterparts. S. African restaurants offer tremendous wine bargains for American tourists, since it appears to me that they mark up the wine no more than 50% above what you would pay at the winery (which is about as cheap as it comes).

Emerging market economies have been the direct beneficiaries in recent years of the Fed's decision to move from very tight to very easy monetary policy, which in turn has helped bring down the value of the dollar and has helped boost commodity prices across the board. Emerging economies have also benefited from very positive structural reforms of their own as well as generally tight monetary policy (with the notable exception being Argentina). I've seen tremendous progress here in S. Africa, and Brazil's accomplishments in recent years would have been almost unthinkable a decade ago (I used to be very bearish on Brazil).

The progress in emerging economies has been reflected in stronger currencies, lower inflation, stronger equity markets, and lower interest rates. From a supply-side perspective, this is fabulous news, since all of these improvements reflect and encourage rising investor confidence and thus more investment and more growth. I don't see an immediate threat to a continuation of strong returns for emerging market investments. Let the good times roll, these countries need it.

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