E Inflation Worries

With Monday a holiday, there is much news today from Wall Street. Today 2 of our Latin American stocks reported, from Mexico, and Panama. GE also reported but you get that elsewhere.

Mark Mobius who used to be the developing country stock picker at Templeton Funds, aruges that emerging markets will outperform once the world recovers from COVID-19. He runs the Mobius Capital Partners fund which he started 3 years ago because these countries have been lagging in growth in the past decade. The first boost will come from their lower average age. The second from technology gains, particularly in his current favorite market, India. And the third from regulatory changes in these wild market which Mark favors, even in China. He also likes Taiwan Semiconductor which produces chips in its foundry but which is sustained by little fabless Taiwan chip designers. He also likes developing country healthcare shares, most of which are obscure.

Mark insists that inflationary risks have been overstated and are based on baskets that are subject to constant adjustment, and therefore not very good indicators.

Since I know Mobius from Harvard where we both were in a seminar on growth by Barrington Moore, I know he is older than me and also richer. I cannot join his fund which has a high entry fee. But I hope that his continuing to work during his old age is not merely to keep ahead of inflation. Mark says that inflation is endemic in the system but that it is offset by income and the quality of life. For someone born in Bufallo who lived in Thailand for ages and then in Hong Kong, he has seen this first hand.

I am not the only one worried about renewed inflation from the COVID-19 spending boom. The Bundesbank in Germany issued a warning today which boosted the price of gold miners. It says tightening “will be required”. For historic reasons, Germans are more worried about inflation than other people. Since I am of 100% German (Jewish) stock, this may explain my worries about stimulus. Mark is also of part German heritage on his father's side but not Jewish. He was interviewed by Reshma Kapadia of Barron's.

Business newspaper article

image source

*Cemex SA de CV, CX, a multinational corporate, had a V-shaped recovery in sales volumes in 2020 which it expects to continue rising in 2021 because of rising global demand. Its Q4 net profits came in at $69.7 mn vs a loss of $238 mn the prior Q4. Sales were up 9% from prior year, at $3.54 bn, helped by mild weather (then not now) in the USA. Despite the enormous disruption of COVID-19 in its operations, CX closed 2020 with a 7% rise in earnings before interest, taxes, depreciation, and amortization, well above its 1% rise in sales, the result mainly of higher prices and lower operating expenses.

Last year CX had the lowest operating expenses as a percentage of sales in its history. But only the first two months of the year were normal in all regions. In February, however, COVID-19 hit its main markets, first Europe; then South, Central America, and the Caribbean; and lastly the Philippines. The cement business depended on the terms and severity of lockdowns in different countries. By year-end, EBITDA margins hit 91% and CX reported the highest fourth-quarter sales since 2014 and the highest Q4 EBITDA since 2016.
But while volumes are rising, the price of cement, aggregates, and clinker will be more moderate and CX expects its operating profits will go up only 10% this year. It also expects to increase is debt, to be funded in part by a sale of shares and some in developing markets. This will allow it to make acquisitions in key markets like the USA, Europe, and other regions. It will also help fund the digitization of operations and a cut in carbon emissions. By cutting the aggregates in its cement mixtures, CX is reducing contamination.

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William K. 3 weeks ago Member's comment

Another good ariticle here, VL. Disturbing but with good insight. I do not "fear inflation", but I certainly dislike it intensely. Inflation damages the resources of all the folks who are not able to simply adjust their incomes upward, which is a class that I do not belong to. Inflation intentionally brings pain and suffering to those folks who have savings and assets that do not automaticly increase in price to adjust for inflation. The federal reserve banks normally seek to cause inflation for the benefit of their stock market friends, knowing very well that it hurts all others. Given that this has been the stated policy for many years, it can not be called an accidental by-product of doing what is best for the most people. So there is a disease in the fed that none will try to cure.