The first in a series on the outlook for leading emerging market economies.
All eyes turn to Brazil this week as the 2014 World Cup competition gets underway. Investors, though, have already had plenty of reason to keep a close eye on the country and other emerging markets, including those lumped in with Brazil under the BRIC label coined by former Goldman Sachs economist Jim O’Neill back in 2001: Russia, India, China.
The economic headlines coming out of those four countries have been troubling. Big question marks hover over the economic outlook for China, for example. The potential fallout from the country’s slowdown has already eaten into growth forecasts and market returns.
Last month’s elections in India triggered what some market wags have dubbed a “Modiboom,” thanks to the pledges of newly elected Prime Minister Narendra Modi to boost infrastructure and attract overseas investment. India’s economy has slowed dramatically, though Modi’s promises were enough to help make India a top-performing global stock market this year. Delivering on those promises is another matter.
Then there’s Russia, at odds with the United States and Western Europe over Ukraine. President Vladimir Putin’s apparent ambition to bring ethnic Russians back into the post-Soviet fold has unleashed waves of geopolitical uncertainty and left the Russian economy under a cloud. Even so, the natural gas deal Russia struck with China could have significant implications for the global energy market.
At the same time, the BRICS nations, including South Africa, are working to create a new development bank with $100 billion in capital and will be holding a summit in Brazil this July during which the details of the bank’s launch and operations will be discussed. Both the development effort and the summit are clear signs that the leading emerging countries fully expect to exert their influence and push back on the global financial engineering of the U.S. and Europe.
With all of that complexity, it’s little wonder that many investors and market pundits have taken a jaundiced view of emerging markets. Even Goldman Sachs warned clients earlier this year that betting on emerging market at the expense of U.S. stocks would likely prove to be a bad idea. So far, in fact, the results have been a mixed bag, with India’s blockbuster gains being an anomaly.
We’ll take a look at each of those countries this week, BRIC by BRIC, starting with Brazil.
Until relatively recently, the hope was that the billions of dollars of infrastructure spending on stadiums and other projects, including transportation links, would provide a boost for the Brazilian economy.
The need wasn’t supposed to be this great: By now, so the theory ran, the country’s rich reserves of commodities coupled with the growth of its middle class should have boosted Brazil into the company of “developed developing” economies, alongside nations like Taiwan and South Korea. Instead, a plunge in commodity prices flattened growth. GDP grew 7.5 percent in 2010; since then, it hasn’t cracked 3 percent.
Anyone hoping that the World Cup will give the country an economic boost may wait in vain, the International Monetary Fund warned recently. Instead, these international economic gnomes cut their expectations for Brazilian growth, calling for GDP to expand a mere 1.8 percent, down from an earlier forecast of 2.3 percent. Meanwhile, inflation is running high: forecasts call for it to range between 5.5 percent and 6 percent this year and next.
Unsurprisingly, the Brazilian government is more upbeat, projecting growth of closer to 2.8 percent. But then, a lot is riding on the success of the World Cup, not just as an entertainment event but in economic terms, for they’ll be followed in only two years’ time by the 2016 Olympic Games in Rio de Janeiro.
This October, in between the two iconic sporting events, Brazilian President Dilma Rousseff will face re-election, giving the country’s citizens a chance to pass their own judgment on her government’s reforms. True, they have been more significant than those in other BRIC nations, but that isn’t enough, given Brazil’s over-reliance on Chinese markets, the outsize levels of bureaucratic bungling, and the inefficiency that means it’s still unclear whether key venues will be ready for World Cup guests.
Are Brazilian markets ready for investors? Probably not. There’s simply too much uncertainty — and far, far too much risk, in the shape of already-high inflation (that may climb higher still…), lackluster GDP, social unrest (in the form of regular protests against the World Cup and the billions of dollars of spending the government has devoted to it), and sometimes wild gyrations in the value of Brazil’s currency, the real. All of which can translate into equally uncomfortable volatility in the local stock and bond markets — without any likelihood that you’ll end up being compensated for all that extra risk.
Over the long haul, Jim O’Neill’s forecast for the BRIC nations — that they would overtake the six largest Western economies to become (collectively) the global growth engine by midway through the 21st century — may yet prove to be accurate. But that doesn’t mean that you need to be heavily invested in each one of these four markets, all of the time, every year from now until the end of the century.
Indeed, if anything, what’s taking place in Brazil suggests that tactical asset allocation is the way to go. Wait for the political uncertainty to be at an end, and for the economic picture to begin improving (or at least, to become slightly more clear). That’s the time to swoop in and begin hunting for bargains.
Right now, the odds are just as good that the World Cup could generate a bunch of negative headlines from sports fans and tourists encountering disappointing facilities or protesters — and then there’s that pesky election to get through. In contrast, there’s nothing much on the plus side yet visible. Wait — and watch.
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