The South Korean economy has been one of the jewels of Asia, and its banking, shipping, trading and technology companies performed extremely well from 2003 to 2007. During a five-year span when the S&P 500 rose 45%, the Korean market (EWY) rose 300%.
More recently, though, the Korean economy has slowed dramatically. The country’s stock market, measured by the Seoul Kospi Index—has fallen 33% this year amid slides in the value of banks, tech and trade.
Now comes word out of the Korea Times this week that September could bring even worse news, as the country’s banks apparently face a looming liquidity crisis.
The newspaper says that in September $6.7 billion in bonds held by foreigners will mature. If they liquidate the bonds en masse, as some experts fear, the country’s currency, the won, would sharply depreciate pushing interest rates much higher and forcing many local financial and industrial firms into bankruptcy.
The Korea Times quotes the Hyundai Economic Research Institute as stating that Korea should brace for a U.S.-type financial crisis as the country’s financial soundness has been worsening at a fast pace at a time when foreign capital outflows are quickening and the national debt is rising. (To learn more, see also: "Global Market Catch a Cold.")
Brazilian Economic Tempo Declines
Those of you who saw my presentations at the San Francisco Money Show may recall that I mentioned there were only four markets or sectors in the world that were still in bull mode and that all of them appeared to be in danger of losing that status.
The four that retained a foothold on a bull market through mid-August were U.S. small-cap stocks (IWM), gold (GLD), energy (XLE) and Brazil (EWZ).
U.S. small-caps passed the test in August and remain, ever so tentatively, in bull mode. But gold, energy and Brazil have all entered "yellow flag" territory by closing for the first time below their 12-month averages. Their bear markets will be confirmed if they close below their 12-month averages again in September.
The one that appears the most likely to suffer the most in coming months, if the bear really takes hold, is Brazil. Its top banks—such as Banco Bradesco (BBD) and Banco Itau (ITU)—are all down more than 20% from their May highs, paced by a decline in lending for real estate and commercial activities.
"We project a deceleration of loan growth in the second half of 2008, and we would need to see more of a slowdown to meet our forecast,” Goldman Sachs analysts said this week. They forecast 2008 loan growth of 26 percent year-over-year in 2008 for banks, down from 35 percent in June 2008.
While Brazil is still growing much faster than the United States, the fact that growth is decelerating is causing a lot of anxiety. It’s a great reminder that it’s not the absolute pace of activity that matters, but the rate of change of that pace.
If Brazilian shares end up falling as much as those of other commodity-based economies, such as Australia (EWA) and South Africa (EZA), we could see a pretty nasty few months ahead.
I have told my Trader’s Advantage subscribers that the last two times that EWZ entered September under its 200-day moving average, it went on to fall 20% over the next five weeks.
Figure that the EWZ, now trading around $73.40, could at least sink to at least $65 later this year.
Jon Markman is editor of Trader’s Advantage and a regular contributor to InvestorPlace.com. To get this type of actionable insight from Jon and other InvestorPlace Media experts go to www.InvestorPlace.com today!
