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Our main story walks through the different ways each country is managing inflation.
We particularly like countries ahead of the curve including Brazil (EWZ) and even China (FXI).
Both kept or increased interest rates to fight inflation but not by so much as to smother the economy.
Brazil’s EWZ ETF trades more than 32% off its 2021 highs and carries a weighted-average price-to-earnings ratio of 16.69. However, the ETF pays a healthy 5.69% dividend yield.
And a strengthening Real against the dollar makes those earnings worth even more.
China’s regulatory clampdown sent shares of US-listed Chinese stocks spiraling.
However, the FXI ETF doesn’t have that problem since it directly invests in the Hong Kong Exchange.
That’s created a nice value. Plus, China’s purge of overleveraged companies strengthens the country’s underlying fundamentals.
And the FXI currently trades at a weighted-average price-to-earnings ratio of 13.2 and pays a decent 2.2% dividend.
Each Country Deals With Inflation Differently
This week, the US Fed laid a clear path to higher interest rates as a way to combat inflation.
Turkey, on the other hand, cut interest rates, sending the Lira plunging to new lows as hyperinflation becomes a reality for the country.
Each country is handling inflation differently. And it’s creating some VERY interesting outcomes.
Let’s start with Turkey, Europe’s gateway to the Middle East.
President Erdogan’s decision to slash interest rates 500 basis points since September spurred 21% inflation. Forecasts already call for 30% next year.
It got so bad the country’s central bank directly intervened in the market to prop up the battered Turkish Lira.
Despite pleas from his government, Erdogan refuses to budge on the issue.
To be fair, the country has one of the highest interest rates in the world. However, the export-driven economy is in shambles with supply chains scrambled.
Emerging Markets Beat The Fed To The Punch
Unlike Turkey, most emerging markets including Brazil, Mexico, and Chile raised rates this year to combat inflation. Even Russia is in the mix with rates at a whopping 8.5%.
Despite a slowdown, China kept interest rates high as it seeks to transform its economy and shed poorly performing companies and reign in real estate companies like Evergrande.
Front-running the Fed, UK’s central bank announced a small rate hike to compare inflation, which was unexpected.
Unlike the Fed, The Bank of England (BOE) doesn’t carry the dual mandate of inflation and unemployment. The BOE solely cares about currency stability.
Interestingly, it’s the first time since 1991 that the UK’s inflation is higher than its unemployment rate.
European Union’s Fakeout
Officials at the European Central Bank (ECB) followed the Fed in cutting its bond purchases.
However, it’s one of the few developed economies that refuses to substantially reduce monetary policy support in 2022 or at least talk about it.
So far inflation in Germany, the EU’s manufacturing hub, hit 5.2%, while Italy came in lower at 3.7%.
Japan Couldn’t Care Less
0.1% – Japan’s latest inflation reading YOY.
Known for the lost decade of economic growth in the ‘90s, Japan appears to be immune to inflationary pressures.
Citing this as evidence, the country’s central bank refused to speak of tightening, defending their extremely dovish stance.
What This Means
When everyone raises rates at the same time, it doesn’t really change the relative price of one currency to another.
Instead, it dampens demand within the home country.
That’s a key reason why the US and emerging markets need to raise rates.
The EU is in a pickle since inflation differs for each of its members.
The Bottom Line: History has shown that raising rates too quickly can push an economy into a deep recession if not an outright depression.
That appears very unlikely in the US as well as Emerging Markets.
We are concerned with the dovish approach by the EU as members like Germany have a historical animus towards inflation.
From a sector perspective, we still favor regional banks and construction. We also like industrials that favor emerging markets such as Caterpillar (CAT).