by Charles Sizemore | January 30, 2014 2:20 pm
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I spoke to Varney & Co.’s Charles Payne this morning about the selloff in emerging markets and what is driving it.
At its heart?
Current account deficits. Turkey, South Africa, Argentina and Brazil — the emerging markets that have been in the headlines the most of late — all have large current account deficits. Part of this is due to slowing commodity exports to a slowing China, but the strength of the local consumer economy — particularly in Turkey and South Africa — is a factor as well.
All else equal, a country that persistently imports more than it exports will see its currency weaken. Of course, all else is rarely equal, and large capital inflows in the form of direct investment and portfolio investment can cause a country’s currency to remain strong even in the face of persistent deficits. This certainly was the case for the United States during the “strong-dollar” days of the late 1990s.
It was just a few years ago that finance ministers in emerging markets fretted that too much capital was flowing their way and causing currency values to rise to the point of choking off economic activity. Annoyed by the rapid appreciation of the real, Brazilian finance minister Guido Mantega declared that he was fighting a “currency war” to keep the real competitive, and that he had no intentions of losing.
Ah, those were the days.
It is important to realize that, while emerging currencies can always go lower, this is not 1997. We are not on the verge of a major emerging market crisis, unless something radically changes from today’s status quo. Unlink in 1997, most of the countries seeing their currencies come under pressure are on floating exchange rate regimes and, frankly, a little depreciation is not entirely a bad thing if it boosts exports and closes the current account deficit.
In the meantime, we’re getting some fantastic bargains in many emerging stock markets.
I also spoke with Mr. Payne about Google’s (GOOG) selling its handset business to Lenovo (LNVGY).
Leave it to Google to keep us all guessing. When Google first bought Motorola Mobility in 2011, we all assumed it was a “land grab” for the company’s patents. Google was getting sued on multiple fronts for alleged patent infringement related to its Android operating system.
We all expected GOOG to keep the patents … and dump the hardware business. Yet Google surprised us all by making a go at it as a manufacturer.
In the final analysis, was it a bad move for GOOG? Not really. After various assets were stripped and sold off, Google ended up paying about $4 billion for the patent portfolio. Given Google’s cash hoard, that is pocket change, and we might never know the extent to which Android needed those patents to avoid punitive lawsuits.
Going forward, Google will have a cleaner balance sheet without the hardware business, and selling to Lenovo makes good business sense. Lenovo has a great presence in emerging markets, and it helps reduce Google’s dependency on Samsung (SSNLF).
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Check out his new premium service, Macro Trend Investor, which includes a free copy of his e-book, The New Megatrend Investor: The Ultimate Buy-and-Hold Strategy That Will Make You Rich.
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