Wednesday, October 3, 2012

U.S. Deflation and Inflation Abroad – BRIC Investment Advice

With unemployment, a huge deficit and rock bottom interest rates, it’s clear that economic trends are pointing to deflation at home and inflation abroad. Something has to give, but unfortunately the government continues to spend freely and run up the federal deficit and the Federal Reserve has refused to raise interest rates.

As a result, this week’s big economic news will likely be the May price reports, reflecting deflation across the board:

  • Tuesday, June 15: May Import Prices. Expected decline of -1.5%
  • Wednesday, June 16: May Producer Prices. Expected decline of -0.5%
  • Thursday, June 17: May Consumer Prices. Expected decline of -0.2%.

Due to a stronger U.S. dollar, super-low interest rates and falling commodity prices, “deflation” talk may emerge next week, but while U.S. prices drop, the fast-growing BRIC investments (covering nations Brazil, Russia, India and China) are fighting rising inflation:

Last Friday, China’s National Bureau of Statistics reported that consumer prices rose 3.1% in May, up from a 2.8% annual pace in April, due to higher food prices as well as rising wages. Last month, Chinese food prices rose 6.1% over May 2009, while non-food prices rose 1.6%. Additionally, labor strikes at three Honda Motor suppliers in China resulted in a 24-to-33-cents-per-hour wage increase. Various Chinese regions have announced increases in minimum wages of from 5% to 27%. Not surprisingly, due to these wage increases, China’s “factory price inflation” rose 7.1% (annual rate) in May, up from 6.8% in April. However, falling commodity prices should lead to lower inflation in the upcoming months.

Last Wednesday, Brazil’s Census Bureau reported that inflation is now running at a 5.22% annual rate, causing Brazil’s central bank to vote unanimously to raise its key interest rate 0.75% to 10.25%. Brazil’s central bank said that it would continue to tighten until inflation falls below 4.5%. Many central bank observers expect Brazil to raise its key Selic interest rate to 11.75% by the end of 2010, in an attempt to slow down its runaway 9% first-quarter GDP growth, which was much higher than the expected 7.6%. The top Brazil investments of this year are soaring dueto this red-hot growth, but the BRIC nation is at risk of overheating.

On Friday, India announced that its industrial output rose 17.6% in April, vs. the same month a year ago. That was significantly higher than economists’ consensus estimate of 13.5%. In addition, Russia is now growing at a 4.5% annual rate with 6.1% annual inflation. Bottom line, the economic growth in Brazil, China and India will continue to boost global growth, despite Europe’s malaise. Due in part to a slow first quarter in 2009 and rapid growth in early 2010, industrial production rates are “through the roof.” BRIC funds here are subsequently red hot.

BRIC nations like these aren’t alone in breakneck growth, either. Check out some of these frontrunners, and their first quarter 2010 growth vs. Q1 of 2009 that have topped even Brazil, India, China and Russia.

  • Singapore +51.0%
  • Taiwan+31.4%
  • Japan+25.9%
  • Thailand +21.3%
  • Turkey+21.1%
  • South Korea+19.9%
  • China+17.8%
  • Brazil+17.4%
  • India+13.5%
  • Russia+10.4%

(Source of Industrial Production Growth Rates: The June 5-11 issue of The Economist)

There is no doubt that Brazil investments have a lot of potential. However, it’s worth noting that there is such a thing as too much growth. Just as America must fend off deflation and falling prices, BRIC nations need to worry about too much growth sparking runaway inflation that does more harm than good.

As of this writing, Louis Navellier did not own a position in any of these stocks in personal or client portfolios.

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