When we thought that Europe was not going to bother us anymore, the small island of Cyprus seemed to be telling us….not so fast. Should we care about Cyprus? Of course, we should care about the Cypriots who are about to have it as bad as the Greeks or even worse. Simply as investors, however, I don’t think we should care.
Cyprus represents no more than 0.5% of the Euro Zone GDP although the small country of 800.000 people has a large bank system. The banks in Cyprus are big because of the deposits they hold from wealthy nonresidents, especially Russians that don’t want to pay taxes in their home country. That reason is also why the Eurozone finance ministers had taken a hard line on the case. Moreover, Cyprus – although big on deposits – is not “too big to fail”. Greece had a bailout of more than 170 billion euros and Cyprus needs less than 10% of that amount: 10 billion euros. Cyprus’ ailments come from its business with Greece, from loans to Greek business and individuals. Last week the stock market was impacted by the crisis and interrupted the big rally that was happening since the beginning of the year. Over the weekend Cyprus got a new bailout that will inflict losses on depositors with more than 100,000 euros and will aggravate the recession already in course.
Even if it were not resolved, I don’t think it would have impacted the US. It would have been another weak menace, like the sequestration that meant little to the markets, although it meant a lot to those who lost their jobs.
To be sure, in the USA the first three months of the year were pretty good for investors who bet in the American economy. The Dow Jones gained more than 10% and the S&P has been flirting with 1565, which is the all-time record reached in October 2007. On Monday, at 10:00 am, the index was within 1 point of the before erasing its gains. The economic data has been mostly good although the consumer is facing some headwinds, such as the increase on the payroll taxes and lay off of workers due to sequestration. This could be offset by income growth, price increase of homes and stocks that led to changes in financial wealth and real estate wealth. The FED is committed to continuing its accommodative policy but is also seeing improvement in the economy. Even when fundamentals are good, the stock market cannot go up all the time and there will always be periods of profit taking. The question is to know if in the medium term the trend is up or down. I still believe it is up and I believe in the old saying, “don’t fight the FED.” So, instead of trying to time the market it is just better to believe in some themes and stick to them. I’ve been talking about the housing sector for a while. If you had invested on ITB - ISHARES DOW JONES US HOME CONSTRUCTION INDEX FUND – you would have gained 62.5% in one year and 6.3% year to date. Thanks to the politicians, that are quieter now, we will not see that many fluctuations, at least until the next round of negotiations for the debt ceiling increasing.
In Brazil the stock market continues to disappoint and struggle: the weaknesses have a variety of causes and, unfortunately for the Government, none related to the international scenario. The erratic government policy in the energy and electrical sectors had a devastating impact on Petrobras and Eletrobras; more recently, there was the problems with the “ X companies” (the companies belonging to Eike Batista Group, all have an X on the name). To be sure, OGX decreased 85.88% in one year, MMX 72,44% and LLX 46,09%, VALE 12%, Petrobras 30% and Eletrobrás 60%. There are opportunities, of course, and the investor has to do its homework to find that out. Whoever bet in the companies linked to consumption had a good run: BR Foods gained 26%, Americanas 25% and Renner 16%, among others.
For the non-institutional Brazilian investor this is unfortunate because there are no good options anymore. For many years, the fixed income market, based on the Brazilian Treasuries, had great appeal. It was easy to leave your money in a fund linked to interest rate and have a real return of more than 5%. Now this is over. So what is the Brazilian investor to do? Some are buying real estate in Miami and New York; others are buying real estate in Brazil. Normally, that’s what happens when you do not have good investment choices.
The real estate market grew in Brazil in recent years, and property prices in some big cities are now very high. A variety of factors - such as stabilization, declining of inflation, sound macroeconomic indicators, wage and employment growth, and new financing instruments - supported the increase on building activity to attend the deficit in housing. The increase in construction and prices was so big that it led some analysts to think there was a bubble, similar to the one we saw in the US. I don’t think it would be similar to the United States because there is no much leverage in Brazil. Also, as I said, there was a deficit. Now the situation might be changing and the lack of investments opportunities for the retail investor can lead to investment in real estate. That is what happened in China and led to the ghost towns, populated by buildings with nobody inside.
Finally, I could not finish without a word about the Brazilian president. In the first year of her Government, 2011, I praised her decisiveness in several moments of crisis, which was more impressive when compared to the indecisiveness of the American and European leaders. Now, looking back at 2012 I am scared of that decisiveness because it looks more and more like wishful thinking.