This from Money Morning:

There clearly are countries – such as the United States and much of the European Union – that are going to collapse into recession, even if only unofficially. But this doesn’t necessarily have to evolve into a global recession – a position that most of the traditional Wall Street establishment disagrees with, by the way.

Let’s take a look at several of Wall Street’s current misconceptions – and see why I’m selectively bullish:

• The Red Dragon (China) is ready to hibernate: Wall Street is worried that a U.S.-induced recession will slay the Red Dragon. There’s no way. If a country can fall into a recession when its economy (as measured by gross domestic product, or GDP) is advancing at a 9.6% clip – at a time when its U.S. counterpart will be lucky to eke out a 1.0% growth rate – well, I’ll eat my hat. The Armani Army, in its infinite wisdom, is worried about a recession in China even though its $1.9 trillion in foreign reserves are more than 32.10% of GDP and external debt is a miniscule 7.6% of GDP (external debt is defined as the amount of debt that China owes external creditors, including consumers, central governments and commercial institutions, according to the CIA Fact Book). By contrast, the U.S. reserves are 4.84% of GDP, while external debt is 84%. The United Kingdom and Switzerland are in even worse shape, with external debt of 382.2% and 279.1%, respectively.
• China won’t be able to survive a drop-off in exports to the United States: Then there’s the myth of China’s export economy. The last time China took a header and export business dropped by 35%, its GDP dropped by less than 1%. I’m betting it will be an even smaller bump this time around, especially since China’s middle class now is increasingly responsible for internal growth – independent of what China exports to the rest of the world.
• The Asian economies are an economic train wreck just waiting to happen: This was true a decade ago, when the United States and Western Europe held all the cash. But no longer. Today, nations such as Singapore, Thailand and Malaysia are running trade surpluses. So is Canada. That suggests that the currencies of these countries are significantly undervalued at a time when their economies are increasingly tied to that of China. What does that tell us? Today, China is the growth engine of Asia; tomorrow, it will be the growth engine of the world.
• The U.S. economy remains the financial center of the world: Today, an estimated 78% of global economic activity takes place outside U.S. borders, which means that even in a recession, an increasing amount of capital circulates beyond the U.S. shores. Indeed, the U.S. stock market now represents less than 30% of total world market capitalization, down from roughly 45% as recently as 2004. Don’t be surprised to see the United States continue to decline in economic relevance. One day, the lion’s share of the financial trades will take place beyond U.S.  borders.
• Because it’s a developed market, the United States remains the world’s safest and most promising place to profit: In the 1980s, the United States accounted for one-third of the global economy; by 2030, that ratio will be cut in half. The reality is that U.S. investors who want to be successful in the years to come will have to learn all they can about markets whose names they can’t yet pronounce.

Wall Street may not agree, but the real adage to embrace and remember is this one: It’s easier to become No. 1 than it is to stay there.

There’s no doubt that the “experts” who are projecting that the world markets will decline further and perhaps even collapse will take issue with my analysis. But it’s important to note that I agree with you – at least in the near-term. Barring a governmentally induced Hail Mary, I think there’s no question that the worst remains ahead of us.

But longer term – I’m talking three, five to 10 years – I am intrigued by the fact that so many emerging markets have collapsed in the chaos, even though the underlying economies haven’t really changed. Everything we know about financial markets history and changes in market behavior suggests that countries backed by high cash reserves tend to emerge from periods of market chaos faster – and stronger – than the economies that had been at the top of the heap when the crisis first struck. [For some insight into which countries have the biggest reserves as a percentage of GDP, take a close look at the accompanying chart].

Where does that leave us? Well, in spite of what Wall Street would have us believe about the Red Dragon, this cash-reserves indicator suggests that China – and countries that have close economic ties with that country – may actually be getting more attractively valued (and not less) by the minute. That’s especially true for longer-term investors.

As for the types of investments that seem most promising, given the troubled times we live in, keep focused on the simple ones. As I’ve long suggested, such simple profit plays have always played well during periods of similar market turmoil. So there’s no reason to believe it will be any different this time around.

After all, the financial history books are filled with notable examples of real earnings and real products enjoying success over long periods of time. Particularly when those profits are being generated by companies focusing on such basic societal needs as energy or infrastructure. Barring a complete collapse in the oil business (or any perfect substitute that’s eventually developed), energy, commodities and infrastructure companies will continue to offer solid upsides.

Source: How to be “Selectively Bullish” – Even in the Face of Financial Crisis

Over the past decade, inflation has been tamed, with an operationally independent central bank keeping it below 10% for almost all of the past decade, compared with 2,500% in 1993. Growth is running at 4%-5% a year, external debt has declined dramatically, commodity exports are underpinning large trade surpluses, and foreign reserves have ballooned to $200bn. All this makes Brazil far less vulnerable to global crises.

And the country has just received a “strong vote of confidence” from ratings agency Standard & Poor’s (S&P), says Economist.com. S&P awarded Brazil’s foreign-currency-denominated debt investment-grade status. It claims Brazil’s pragmatic policies have created a “sounder foundation for economic growth and fiscal improvement over the past five years that should continue”.

The upgrade, which in due course seems likely to be followed by upgrades from the other major ratings agencies, Moody’s and Fitch, will gradually lower the cost of capital in Brazil – as borrowing costs fall with a better credit rating and money flows into the country – boosting growth prospects.

International funds that are barred from buying sub-investment-grade bonds will now be eyeing up Brazil and interest among global equity investors should mount amid optimism over future growth; with new fixed-income and equity flows and more foreign direct investment on the cards, the move is a “strong long-term positive for Brazil’s financial markets”, says Citigroup’s Geoffrey Dennis. The stockmarket has gained over 8% since the upgrade and the Bovespa index is at a new record of around 70,000; it has risen sevenfold since 2002.

There is ample scope for further gains in the long-term. Brazil is ideally placed to cash in on the secular commodities boom, given its own oil, a thriving ethanol production sector – thanks to its sugar cane – world-beating iron-ore production and “one of the most efficient agricultural sectors in the developing world”, says Stephen Foley in The Independent.

Bulls also point to the fact that exports comprise just 14% of GDP, shielding Brazil from “changes in the export environment”, as Daiwa puts it; growth has been led by domestic demand as job and household income growth has fuelled consumption among the expanding middle class. Retail sales were up by an annual 12.2% in February.

But now short-term interest rates are rising, says Dennis. In April, the central bank hiked rates by 0.5% to 11.75%, and with growth strong, inflation back to 4.7% and inflation expectations rising steadily, rates may have to go higher than the 13% economists are pencilling in. He also points to “notably rich valuations”, with the market’s forward p/e of 12.4 42% above the historical average and the price to book value ratio at a record 3.5.

Moreover, as the past year has shown, Brazil will not be immune to a likely relapse in global markets amid fears over the American and global economies – note that the Bovespa index is highly cyclical, with the energy and materials sectors comprising 60% of the index. There will probably be better long-term buying opportunities in the months ahead.

Source: Brazil Is Well Placed for Triumph, But Wait for a Better Time to Jump In