Global markets diverge, which could be a good sign

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As the G-20 summit concluded with a coordinated stimulus plan to the satisfaction of many, it's interesting to see the impact 2009 has had so far on global markets. While in late 2008 the sharp declines hit most markets with the only difference being how sharp the declines were, so far in 2009 global markets have begun diverging.

In the first quarter, if we look at world markets in U.S. dollars, 12 markets have had positive returns, with five of them in the double digits. The five are Chile, Russia, Sri Lanka, Brazil, and Pakistan. To compare, U.S. markets recorded double-digit declines during the same quarter. Why are markets diverging now?

Some of this can be attributed to local economies. For example, while Chile's economy is expected to grow just 0.4 percent in 2009, it beats the expectation of a 1.7 to 2.75 percent contraction for the world economy (depending on who you ask). Similarly, Brazil is forecast to contract only 0.3 percent in 2009. If Chile and Brazil's markets' performance can be explained by the better economic growth, this doesn't explain Russia's first-quarter double-digit performance since its economy is expected to contract 4.5 to 5.6 percent in 2009. The OECD, meanwhile, forecasts the U.S. economy will contract 4 percent in 2009.

Other than the economy, what else can it be then? Well, past performance may also play a role here. For example, Russia's RTS index nosedived nearly 48 percent in the fourth quarter of 2008, which could explain its nine percent gain in the first quarter of this year. Similarly, Brazil's Bolsa de Valores de Sao Paulo plunged more than 24 percent in the fourth quarter of last year, so its 9 percent gain so far this year may make more sense. But the Dow Jones Industrial Average also declined over 19 percent in the fourth quarter and continued to decline over 13 percent the past quarter.

So if it isn't just the local economy that's causing market divergence, and it isn't just past performance that feeds this divergence, then something else must be in the works, like investors reacting to seeing the light at the end of the tunnel. While projections for 2009 and even 1010 continue to be dismal, there have been plenty of leading indicators giving markets hope the economy is bottoming, especially that of the United States. With the economy seen bottoming soon, investors believe markets have likely bottomed already. As they return to the markets, they are willing to take on greater risks than before, meaning looking for deals everywhere things seem cheap enough and/or prospects good enough.

So which global markets are poised to gain most from a global recovery? Some say those heavily weighted with commodities and materials, such as Canada and Brazil. Others see the recoveries of U.S. and Asia as the major drivers, and hence the place to be. Europe, meanwhile, is seen as cheap for a reason, but it is cheap. Investors should remember, however, that the dollar can make a big difference in international investing.

Either way, this trend of divergence is generally seen as a positive and yet another sign of a recovery.

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