Emerging Markets

The Emerging Markets Look More Like Submerging Markets


From left, Indian Prime Minister Manmohan Singh, Chinese President Xi Jinping, South Africa President Jacob Zuma, Brazil's President Dilma Rousseff, and Russian President Vladimir Putin at the BRICS Summit on March 27

Photograph by Sasha Mordovets/Getty Images

From left, Indian Prime Minister Manmohan Singh, Chinese President Xi Jinping, South Africa President Jacob Zuma, Brazil's President Dilma Rousseff, and Russian President Vladimir Putin at the BRICS Summit on March 27

The U.S. economy, we’re told, is in the middle innings of a long humbling at the hands of emerging markets. Here we have Beltway melodrama and—no joke—job creation by way of the Doritos Locos Taco. As for developing upstarts, they by and large enjoy better growth, more stable debt balances, burgeoning consumer classes, and fresh swagger at international confabs.

The ascendance of the emerging markets was supposed to be brought into sharp relief as the world recovered from the financial crisis. But since they peaked in late 2007, the BRICs—Brazil, Russia, India, and China, the supposed core of the emerging-market dynamo—have on a total-return basis vastly underperformed the U.S.’s Standard & Poor’s 500-stock index. While the iShares MSCI BRIC Index is down 38 percent since its December 2007 high, U.S. stock indexes have made up all their lost ground and more, rising 5 percent over the same period. And the trend shows no sign of reversing: In 2013, the broad MSCI Emerging Markets Index is off to its worst start to a year since 2008, lagging behind shares of developed economies by the most in 15 years, according to Bloomberg data.

It’s also the first time in 15 years that developing shares have underperformed during a global market rally. They are, it seems, victims of their own decade-plus of outsize success, with their governments trying to contain inflation while keeping growth at a satisfactory pace. According to Bloomberg’s Michael Patterson and Inyoung Hwang, most emerging-market companies have missed analyst profit estimates for the last five quarters, with expansions in economies like China and Brazil slowing to their weakest clips since 2009.

There are exceptions to this trend, like Thailand and the Philippines. The latter, in fact, was highlighted in a position paper (PDF) by Turner Investments touting the era of the TIMPs, which groups Turkey, Indonesia, and Mexico alongside the Southeast Asian upstart.

In China, the center of emerging-market gravity, Beijing is capping retail fuel and natural gas prices to address potentially destabilizing inflation. Along with intervening to tamp down fuel prices, Brazil is moving to keep down utility rates, bank lending profits, and mobile-phone costs. None of which has particularly encouraged BRIC residents to put money into their homeland shares.

Foreign Policy’s War of Ideas blog has a headline out that reads: “The Case for Kicking All the Countries Out of the BRICS.” The post collects critiques from a variety of experts questioning the validity of the BRICs as a coherent investing thesis. “India is as bad on Russia on governance and corruption,” it quotes a regretful Jim O’Neill, the recently retired Goldman Sachs (GS) economist who coined the term in 2001.

You could, of course, look at all the hand-wringing over developing markets as a contrarian indicator—not unlike the prevailing pessimism of a decade ago that presaged a boom.

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

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