2013 Emerging Markets Forecasts:November, 18 2012
BRICs – have they hit the wall?
The BRICs have witnessed robust growth in 2010, 2011 and the first half of 2012. However, recently they have been faced with slowing demand growth raising concerns over their ability to support a weak global economy this year as many have hoped for.
Going forward, BRIC economies will face challenges from:
- a deteriorating global economy, particularly in Europe;
- a reversal of investor risk appetite moving capital from the BRICs (and other emerging markets) to safe havens; and
- a loss of confidence at home.
As a result, we expect a moderation of growth in 2012.However, the authorities in these economies have plenty of scope to loosen monetary policy and provide fiscal support so we expect policy measures to provide a boost in the second half of 2012.
There’s one new trick investors will have to learn going into 2013: the BRIC economies (Brazil, Russia, India and China) that have been so fashionable over the years, will all run into trouble next year and should be avoided.
In the last decade monetary authorities worldwide, led by Fed chairmen Alan Greenspan and Ben Bernanke, have kept interest rates too low. Money has flooded into the emerging markets, especially the favored BRICs. The result has been a surge of corruption in all four BRICs, accompanied by a surge in “malinvestment,” a term beloved of the Austrian school of economists and describing investments that is entirely misdirected and a waste of resources :
- In China, the economy is slowing and there is a gigantic morass of bad loans in the banking system, perhaps five times the size of the bad loans about which everyone worried a decade ago. A 2008-style banking collapse and government bailout in China seems inevitable – and we know what that does to an economy!
- In India the fine Vajpayee government of 1998-2004 was replaced by an ungrateful electorate with a return to the socialist Congress party, which had wrecked India’s economy from 1947-1990. The budget deficit in India, by both the central and regional governments, is gigantic now and is “crowding out” the private sector from the financial market. We also can expect a surge in inflation and a balance of payments crisis.
- Russia, Vladimir Putin has effectively established himself as President for life, and has taken control of the economy’s major sectors. The Rosneft buyout of TNK-BP indicates that the Russian state will use its resources to assert economic control. This is already working poorly, and it will stop working altogether when the price of oil drops.
- Brazil is meddling in its major companies such as Petrobras and Vale, whose results have sharply deteriorated. Public spending is way out of control, mostly through subsidized loans from the state bank BNDES. Like Russia, Brazil will fairly quickly run into a balance of payments crisis and certainly won’t enjoy its past rapid growth.
Since investors saw BRICs as a bloc on the way up, they will almost certainly panic simultaneously about all four on the way down, and cause a global financial crisis involving all four. That’s if the Eurozone’s problems or Japan’s government debt don’t cause one first.
The good news is the world is a big place and there are still markets that offer investors the benefit of the world’s fastest economic growth.
Emerging Markets Outlook
PREMIUM RECO : Three Emerging Markets to Buy
As investors, we can only protect ourselves to a limited extent, and certainly should not “sell at the bottom,” as some unfortunates did in early 2009. Certainly we should not put our money in any of the BRIC trouble spots.
However,there are other emerging markets whose prospects remain excellent. They include Singapore, Chile and the Philippines. Here’s why emerging markets are better bets in 2013:
- Singapore is now at European standards of wealth and is projected by the Economist team of forecasters to grow by 4% in 2013 after a slowdown in 2012. It also ranks top or close to it on international indexes of integrity and business-friendliness. Try the iShares MSCI Singapore index ETF (NYSEARCA:EWS).
- Chile remains the best-run country in Latin America, with high scores on integrity indexes and a strong mineral sector. Aberdeen Chile Fund (NYSE:CH) is the recommendation here.
- The Philippines has been off most investors’ radar screens, but is expected to grow 6.0% in 2013. The iShares Philippines Investible Market Index ETF (NYSEARCA:EPHE) gives investor coverage of this market, although at 17 times earnings currently its pricing is a little rich.