JP MORGAN held its annual Brazil Opportunities Conference on April 14 and 15. I extracted the comments on the presentation made by analyst Adrian Mowat. He articulates causes of a possible slowdown in China and how this can affect Brazil in the short term. I am not sure I agree with all of it. Iron ore prices have gone up almost 100%, this should mean something.
Extract from the report:
Adrian Mowat – Commodity concern: Adrian Mowat’s presentation focused on the risks of a China slowdown in investment, thus offering risks also to the Brazil outlook, especially regarding iron ore exports.
The Chinese government’s main concern has been nascent inflationary pressures, and it will try to slow down the economy to avoid inflation. To do that, it will continue to tighten monetary policy and will also remove the stimulus put in place late in 2008 which allowed China to grow by 8.7% in 2009.
The idea is to shift growth from investment to consumption and exports. (My comment: if China is to shift from investment to consumption, do Chinese have buying power for that? )
There is indeed a distinction between GDP growth and the composition of GDP, which is what is shifting. In our view, there will be a slowdown to fixed asset investment from 8% in 2009 to 4.9% in 2010. Otherwise, if FAI continues to grow at the same pace as in 2009, the Chinese economy would be growing by 13% in 2010, further enhancing inflationary risks.
Adrian Mowat also pointed out that China’s commodity demand is disproportionate to its share of global GDP, with 59% of iron ore global consumption and 47% of steel. (My comment: that would make sense to me, because China is in the process of building infrastructure, the same case we have in Brazil. On the other hand, the recent increase in iron ore prices would not confirm this thesis)
The commodity concern was highlighted also with data from cumulative inflows into commodity funds, which showed flows of over US$50.4 billion in 2009, more than 60% higher than the previous record year (2006) but with cumulative outflows already observed in 2010, thus prompting another risk to the commodity story.
Beyond commodities, we continue to have a positive view of the global recovery with DM economies benefiting from positive economic surprises, and DM equities technically and fundamentally attractive.
Overall risks to equities highlighted include inflation (which now has a less favorable base effect), bond market volatility, financial correction in commodity markets, and central bank policy risks as they fight asset inflation. On April 19, Adrian Mowat moved Brazil from N to UW in his EM model portfolio.”
BRAZILGLOBAL.NET 