Brazil’s (EWZ) economy, nearly 60% of South America’s (ILF) gross continental output, entered into technical recession following the second consecutive quarter of GDP declines, the latest reading a fall of nearly 2%. Economic data assessing the health of Brazil’s largest South American trade partner, Argentina (ARGT), remains “flawed”, according to the International Monetary Fund, which believes the country will only grow marginally in 2015 and remain stagnant in 2016. Including contributions from Venezuela, which is dealing with near-hyperinflation, the combined gross national product of the three struggling countries accounts for approximately three-fourths of South America’s entire economy.
Though less than half the size of Brazil’s, Canada’s (EWC) economy has also fallen into recession during the first half of the year, with economic activity in the country dropping 0.5% during the second quarter following a more aggressive slide in the prior three months. The Financial Times reported that earlier last month, “oil from Canada’s tar sands has skidded towards $20 a barrel, a level not seen for international crude prices in 12 years.” Runaway production, transportation limitations, and a refinery disruption in the US has largely been responsible for the massive drop in Canadian crude oil prices, but structural reasons (including OPEC and US shale oversupply) aren’t helping. Canadian Natural Resources (CNQ) is on our list of dividend yields to avoid. Even Target (TGT) gave up on its initiative to expand into the country, perhaps revealing a degree of oversupply in consumer markets despite the retailer’s well-publicized and internally-admitted missteps.
The African continent is not immune to global pressures. Growth in Nigeria (NGE), the largest economy in Africa, has decelerated significantly to a pace of ~2.3% expansion during the second quarter (more than 4 percentage points slower than that achieved in the year-ago period), and many observers are pointing to the high probability that the economy will succumb to recession by the end of the year. Nigeria remains heavily oil-dependent, with reportedly as much as 70% of revenues generated from the black liquid, and as energy resource markets remain under pressure, Nigeria’s pain will only grow. The gross domestic product of the most developed economy on the continent, South Africa (EZA), shrank 1.3% in the second quarter versus consensus expectations of 0.6% growth. The South African rand is trading at an all-time low relative to the US dollar.
The equity market of one of the largest economies in the world, China (FXI), has collapsed in the past several months, and economic purists are crying foul as the Communist government directly intervenes to prop up share prices. Property prices are reportedly under pressure in Hong Kong and Shanghai, and auto sales haven’t been great. General Motors (GM), Ford (F) and Nissan (NSANY) showed that sales of their models in China dropped in August, even though Toyota (TM) and Honda (HMC) fared better. Perhaps most disappointing is that Best Ideas Newsletter portfolio holding Alibaba (BABA) offered some very cautious comments on consumer spending and gross merchandise volume. We knew such negative comments were coming, but shedding Alibaba in the $70s only to pick it up once the dust settles is a trade fraught with too much risk, in our view. Shares trade at ~18 times March 2017 year-end earnings.
Yet, US markets are rallying, with the S&P 500 (SPY) now only trading ~8% below all-time highs set in late May. Hopes that central bankers around the world will yet again flood the global markets with excess liquidity, driving prices ever higher, and views that conditions are so bad around the globe that the Fed won’t engage in contractionary monetary policy beginning in September has traders jumping on board. Bad news is good news again, so therefore terrible news must be fantastic news. What a ridiculous thing to say. You know it and we know it, but it’s true.