Will the superior economic performance of developing economies such as China and Brazil translate into superior stock market returns over the next 12 months?

Or will the dismal performance of the world’s developed economies—as the United States and the European Union slide toward slow to no growth—drag all boats down to the bottom?

In other words will emerging stock markets decouple from developed stock markets in the last part of 2011 and in 2012?

I think that’s the most important question facing stock investors right now.

What’s decoupling? It’s when a stock market dances to its own tune rather than moving in lockstep with other markets or with the global market as a whole.

Decoupling is different—or maybe you can call it an extreme case–from relative out- and underperformance.

We’ve been through a good example of out- and under performance in the last part of 2010. In the fourth quarter of 2010, for example, the U.S. Standard & Poor’s 500 gained 10.8%. The Brazilian stock market, as tracked by the iShares MSCI Brazil Index Fund (EWZ), gained just 4%.

Sometimes the outperformance can be really extreme. From December 31, 2010 to its peak on April 29, 2011 the S&P 500 climbed to 1364 from 1258. That’s a gain of 8.4%. From December 31 to April 29 the MSCI Brazil Index Fund went from $76.23 to $76.55. That’s a gain of 0.4%.

But even then the two markets moved in the same direction—even if just barely.

Pure decoupling is different—and rarer. Like what happened in 2007. That year in the fourth quarter the S&P 500 went down by 3.6% while the Brazil Index Fund went up by 11.4%. For the year the S&P finished ahead a paltry 4.9% and the Brazil Index Fund was up 74.8%.

Could we see that kind of decoupling in the remainder of 2011 and in 2012? (Or even just extreme out performance?)

The economic growth trends give decoupling a good chance. Read more

Faster growth than McDonald’s but Arcos Dorados faces some unusual risk too

Just looking at growth rates, if you want to load up your portfolio with Big Macs, you should buy Arcos Dorados (ARCO) instead of McDonald’s (MCD). On August 1the largest McDonald’s franchisor in South America reported second quarter earnings of 7 cents a share, four cents a share above analyst estimates. Revenue climbed by 28.7% from the second quarter of 2010. (The company only went public back in April 2011.)

For all of 2011 the company told investors to expect revenue growth of 22% to 24%–up from prior guidance for 15% to 17% growth—and net income growth of 35% to 45%.

Sure beats the 11.3% earnings growth that Wall Street analysts are projecting for McDonald’s in 2011.

No wonder McDonald’s is trading at 17 times projected 2011 earnings and Arcos Dorados trades at 31 times earnings. That’s a PE to earnings growth rate ratio of 1.5 for McDonald’s and .89 for Arcos Dorados (using the lower end of the company’s 25% to 45% net income projected growth rate.)

Time to snap up some shares, right, even though the stock has rebounded to $24.91 as of 1:00 p.m. New York time today, near the top of its 52-week range, from $22.03 on August 8 and $19.98 on July 18.

Well, not unless you understand exactly how tough a battle Arcos Dorados faces fighting inflation in Argentina and Brazil. Read more

Update Itau Unibanco (ITUB)

Want to know why Brazil’s stock market was the first global market to fall into a bear? You can see the reasons for the fears that have been crushing Brazil’s stocks in the August 3 earnings report from Itau Unibanco, for my money Brazil’s best-run bank. (Itau Unibanco is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ )

The company announced that for its second quarter net income climbed 14% from the first quarter in 2010. Adjusted earnings per share, which exclude one-time items, were 73 centavos a share. Analysts had been expecting adjusted earnings per share of 82 centavos so the bank missed estimates by almost 11%.

The problem with the quarter wasn’t loan demand. Read more

Update Gerdau (GGB)

Brazilian and U.S. steel-maker Gerdau (GGB) was up 3.6% yesterday and another 1.3% today, June 30, as of 3:00 New York time on calls from Goldman Sachs and Deutsche Bank for a possible third-quarter surprise in demand for steel and for rising prices with current levels forming a floor. (Gerdau is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

Shares of other steel-makers were up as well with Nucor (NUE), for example, gaining 4% yesterday and today.

I think it’s the positive change in sentiment toward emerging stock markets that has led to the relative out performance by Gerdau to the steel group. Brazil’s major market index, the Bovespa is up 1.6% from June 24 through 3:00 New York time today, June 30. That’s quite a contrast to the 4.1% loss recorded by the index from June 9 through June 16. And during that period Gerdau has substantially underperformed the market index. In fact, for 2011 to date shares of Gerdau are down 20.63% versus a drop of just 2.81% for the iShares MSCI Brazil Index (EWZ).

So you can see why Gerdau might be bouncing higher than its peers today.

On the fundamentals Gerdau isn’t out of the woods yet, but the forest is thinning. Read more

Buy GOL (GOL)

Doing some catch up on this stock. I added GOL (GOL) to the Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on January 18, but this is the first time I’ve had an opportunity to explain why in detail or to actually add it to the portfolio. I’m still working on explaining the other sells and buys announced on January 18 from that group.

Shares of GOL Linhas Aereas Inteligentes (GOL) continue to close in on the June 29, 2010 low at $11.7182. Even yesterday’s solid report on May traffic couldn’t keep the stock of Brazil’s low cost airline out of the red. Today, of course, they’re up on the global bounce but I’m not sure how long that will last.

May traffic, GOL reported yesterday June 13, climbed by 12.7%. The company recorded 2.44 billion revenue-passenger kilometers in May, up from 2.17 billion in May 2010. (A revenue-passenger kilometer is calculated by multiplying the number of paying passengers by the number of kilometers flown.)

GOL’s load factor—the percentage of available seats that are occupied—climbed to 62.9% in May from 57.9% in May 2010.

The problem for GOL—as for all the world’s airlines—is higher fuel prices. Read more