Emerging Markets

Are the BRIC Nations Cracking?


Contract workers fit drill pipe sections on the drilling floor of an oil rig in the Salym oilfields near Surgut, Russia.

Photograph by Alexander Zemlianichenko Jr./Bloomberg

Contract workers fit drill pipe sections on the drilling floor of an oil rig in the Salym oilfields near Surgut, Russia.

Brazil, Russia, India, China. Group these developing nations together, as Goldman Sachs’s (GS) Jim O’Neill so presciently did in 2001, and you have the BRICs—perhaps the past decade’s most famous macro investing call.

The bloc’s subsequent ascent has been breathtaking. Its output has grown more than fourfold. China has dinged Japan to become the world’s second-largest economy. Brazil, which long sported a comparative advantage in hyperinflation, has become such an economic powerhouse that the Economist bestowed upon the nation this classic cover. According to the International Monetary Fund, the BRICs’ combined gross domestic product soared to $13.3 trillion last year, from $2.8 trillion just 10 short years ago. The MSCI BRIC index has gained more than eight times what the S&P 500 index returned during the past decade. Good call, Jim.

But like all fine investment bull runs, this one could be drawing to an end. According to Bloomberg data, for the first time in 13 years Brazil’s real, Russia’s ruble, and India’s rupee are weakening the most among emerging-market currencies, while China’s yuan has fallen the most since authorities devalued it in 1994. The rupee is at a record low against the dollar, while India is being cited by Standard & Poor’s (MHP) and Fitch as potentially the first BRIC country to lose its investment-grade rating.

Last month investors pulled $6.3 billion out of Brazil’s stocks and bonds and $5.8 billion from Russia’s. Brazil’s consumer default rate is at a three-year high; its stock market has round-tripped to where it was in 2009. Even though Brazil’s government has slashed interest rates to a record low while extending tax breaks and subsidizing credit, its economy is growing nowhere near the 7.5 percent clip it enjoyed in 2010; last year it managed a 2.7 percent gain. Russia’s oil exports—its economic mother’s milk—are at an 18-month low. Home values fell in a record 54 of 70 cities tracked by China’s government; growth in industrial production, China’s economic staple, slowed recently to a three-year low.

“In the absence of well-developed domestic consumption, the emerging markets—and by extension, their equities—are heavily dependent upon exports,” says Jason Trennert of Strategas Research. “With Europe in recession and the U.S. flirting with one, many investors might see BRICs stocks as a bridge too far.”

BRIC governments are now working overtime to staunch capital outflows and stoke their citizens’ spending. While all eyes are on the regressing “developed” economies of Europe, will these developing giants find a way to keep growing? Possibly. Still, the BRIC troubles represent another knock against the idea of decoupling—the fantastic notion that emerging markets can thrive, no matter what befalls the rest of the world.

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Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.

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