Markets took a breather from yesterday’s sell-off with most eyes looking forward to Apple’s earnings. Here at Emerging Money, we’re a bit more preoccupied with action around the world, such as new Chinese small-cap scandals, more Indian telecom regulations, and Brazilian interest rate concerns.
Anonymous Analytics has uncovered yet another Chinese small cap whose balance sheet doesn’t dovetail with reality. The company in question, Huabao International Holdings, a maker of flavors in perfumes and tobacco products, consistently reported higher margins than its peers, which led to the initial investigation. It’s a good rule of thumb for investors to avoid Chinese small caps as it’s incredibly difficult to discern which entities are legitimate firms and which are fraudulent. In sum, stay away from names like Sino-Forest and Trina Solar (TSL, quote).
Indian telecoms moved sharply lower today after the Indian government announced price hikes on the cost of 2G spectrum. The new prices of 2G spectrum will prevent smaller companies from competing for 2G concessions due to the exorbitant cost to be charged by the government. As the Indian government continues to implement increasingly more onerous regulations and fees on companies, the difficulty of doing business in the Indian subcontinent increases. This inhospitable business climate could hamper India’s economy (EPI, quote) going forward.
Speculators are betting on a weaker real over the near-term under the assumption that the Brazilian government may change the rules on savings accounts, which currently yield a mandated 6.5%. Leaving this rate intact makes any further interest rate cuts quite difficult. Surprisingly Copom, the entity that determines Brazilian interest rates, last week reiterated its dovish stance towards interest rates and implied that further interest rate cuts remain a possibility in order to foster growth in the Brazilian economy (EWZ, quote). However, the feasibility of such rate cuts remains in question as Brazilian inflation picked up steam in April.
The Central Bank governor of Greece informed his government that a failure to stick to austerity measures could threaten the future of the Greek economy (GREK, quote). “What is at stake is the choice between an orderly, albeit painstaking, effort to reconstruct the economy within the euro area, with the support of our partners; or a disorderly economic and social regression, taking the country several decades back, and eventually driving it out of the euro area and the European Union,” he said. While Greece has somewhat subsided from the minds of traders as the result of news in Spain, Italy, and France, the country’s economic reforms are requisite if it wishes to remain a part of the European Monetary Union. However, with social unrest the direct result of increased austerity and rising unemployment, staying the course with these economic prescriptions will become increasingly difficult.
Through the parable of a couple creating a successful joint account and subsequently inviting family members to join, Rogoff delightfully describes the problems plaguing the euro zone. His conclusion that labor mobility is insufficient to support a currency union and that more fiscal integration is imperative for the ultimate success of the euro (FXE, quote). As reforms continue to stall, and Euroskeptics increase in power throughout Europe, achieving the requisite integration for a stable currency area will continue to prove difficult.
Disclosure: Author’s immediate family is long EPI and EWZ