Is the BRIC bull run over?
- 27 June 2012
Bloomberg reports that 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 it was devalued it in 1994. As a result, P&G, the world's largest consumer-goods maker, has trimmed its profit forecast for the second time in as many months in part because of currency losses. While Brazil's Fibria Celulose SA (FIBR3), the biggest pulp producer, has asked banks to loosen restrictions on dollar loans as the real hits a three-year low.
The report says that as much as $6.3 billion has been pulled out of Brazilian stocks and bonds by investors in the last month alone, while some $5.8 billion has been dragged out from Russia's stock market in the same period. The rise in the rate of consumer defaults in Brazil, a fall in the price of oil exports in Russia, India's budget deficit and a slump Chinese home prices have all been attributed for the capital outflow from emerging markets.
"I am quite bearish," Stephen Jen, a managing partner at hedge fund SLJ Macro Partners LLP and a former economist at the International Monetary Fund, said in a phone interview with Bloomberg. "When the global economy and capital flow slow down, it's going to expose a lot of problems in these countries and make people stop and ask questions. A run on the currency could be particularly ugly."
Meanwhile, Pablo Goldberg, Global Head of Emerging Markets Research at HSBC told CNBC's "Squawk Box Europe" that the unresolved euro zone debt crisis the prospect of slow growth was also creating a risk-off environment for investors.
"We're [seeing that] investors are revising their outlook for growth for these big economies. It's not only about Brazil, it's not only about India but also in China. Investors are thinking it [the growth rate] over," he said.
Goldberg said that some countries, such as Brazil and India, were experiencing "structural problems from growing" and that the government's need to work on reforms.
"India is one of the countries that needs to work a little bit harder in terms of structural reform to make the market more competitive and to reduce some of the bottlenecks that are leading to price increases and…deficits," he said.
He added that investor concerns over the rule of law and corruption in emerging markets was another part of the structural reforms that were needed.
"Improvement in the rule of law in emerging markets in general is something that we need to continue to see. Some of these emerging markets are a little bit behind where we'd like for foreign investors to feel more confident to come in," Goldberg said.
In conclusion, Roben Farzad, the senior writer for Bloomberg Businessweek writes that "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."
More on Mindful Money
To receive our free daily newsletter sign up here.
- Car insurance premiums start to rise as fake whiplash claims continue to plague insurers
- Lenders cut mortgage rates to record lows
- Pensioners could be hit with 45% tax charge shock when new freedoms kick-in
- Disappointment as Government's Pensioner Bonds will not pay monthly income
- Tesco chairman steps down as group confirms it actually overestimated its half year profits by £263m
- Lloyds expected to axe 9,000 jobs over the coming three years as part of strategic review
- Is the bull market in shares now under threat?
- GSK is a "buy", but pharmaceuticals still under pressure says Share Centre
- As Junior ISAs mark their third birthday, Child Trust Fund savers need to weigh-up their options
- Equity market volatility: A simple correction or the beginnings of a bear market?