While the US has been steadily regaining its share of global market capitalisation over the last year or so, the BRIC countries have lost ground, says Sunil Kewalramani.
The BRICs model, developed by Goldman Sachs in “Dreaming with BRICs : The path to 2050”, at the start of the century became synonymous with economic growth, opportunities, challenge and change. As global equity markets rallied across the board from 2003 to 2007, the US lost a huge amount of its share of global market capitalisation, falling from about 45 per cent to a low of 24 per cent. At the same time, BRIC countries went from about 4 per cent of world market capitalisation to nearly 16 per cent. In the backdrop of a global slowdown, the US has been steadily gaining the market share back over the last year or so, while the BRIC countries have lost ground.
Over the last year, the US has performed better than Russia and China, in line with India, and worse than Brazil. Russia’s stock market is down the most of the BRIC countries at minus 68 per cent. China’s Shanghai Composite is down 46 per cent and has really picked up lately. The Sensex is down 43 per cent, which is right in line with the S&P 500, and Brazil is down 36 per cent.
The last ten years have been very tough for US equity markets, with the S&P 500 now down 42 per cent on a simple price-basis. But even after the suffering that BRIC markets have had over the last year, their ten-year returns remain strong. Russia is down 68 per cent over the last year, but it is still up 689 per cent over the last decade (we had to put its performance on a secondary axis in the chart). China is up 84 per cent, India is up 136 per cent, and Brazil is up 314 per cent.
The BRICs have been caught in a whirlpool of global risk aversion, forced deleveraging and winding up of the yen carry-trade and dollar carry-trade that has taken little account of their economies’ fundamentals or long-term growth potential.
The movement of the dollar has also played a crucial role. When the dollar is weak, emerging markets outperform and when the US underperforms, and when the dollar is strong (as at present), there is a rush to the safety of the American shores.
Lack of synergies among BRICs
It now seems that the grouping lacked the synergies so essential to merge them together. All that the four countries share in common is their continental geographic scale and large economic size.
In sympathy with the fall from grace of the commodity-in-chief, oil, the Russian stock market has suffered the steepest fall of the four stock markets in 2008. Brazil’s currency has dropped about 50 per cent in the last three months as the weakening oil and strengthening dollar has prompted investors to embrace the security of US Treasuries, whose yields are now at a 50-year low. Down 24 per cent against the dollar in 2008, the Indian rupee may go for a toss if a sudden spate of portfolio outflows and a tailing off of foreign direct investment make it harder to finance an ever-ballooning current account deficit. Over 20 million Chinese have lost their jobs and The People’s Bank of China is being forced to allow the renminbi to depreciate to boost exports.
The latest KPMG/Markit business outlook survey of 1,800 BRIC manufacturers monitors trends in activity by deducting the percentage of companies forecasting a decline in activity in the next 12 months from the percentage expecting an increase. In January 2009, this balance fell to 3.5 from 47 in July 2008 and 64 in January 2008. Thus the BRIC economics seem to be falling apart at the seams and an investment in the BRICs portfolio does not look as diversified an investment as it once appeared to be.
China’s dominance in goods is often compared to India’s in services. The way the currencies of the BRICs have moved suggests that trading BRICS should be viewed from a ‘relative value perspective’ rather than an ‘absolute return perspective’.
It may not be inapt to put Brazil and Russia, being commodity-play, in one bucket, and China and India being low-cost manufacturing and service destinations of choice, in another bucket. The export-to-GDP ratios for China and India have gone up dramatically over the last 15 years. Brazil and Russia could, as the world slows, witness lower rates of growth than China and India over the next two years, until world economic growth begins to retrace itself. Dalinc Ariburnu, global head of emerging markets at Deutsche Bank, forecasts growth in Russia to drop sharply to 3.5 per cent in 2009 and Brazil’s to 2.9 per cent. On the other hand, he expects China to clock 7.6 per cent growth in 2009 and India 6 percent.
The US Fed had recently offered dollar swap lines to the four emerging market countries — Brazil, Singapore, Russia and South Korea, indicating whom the West considered as more important strategically whose failure could jeopardise the world economy. It is prudent to recollect that the US did not extend swap lines to China and India as a part of the Fed’s response to the global credit crisis.
Jim O’Neill, chief economist at Goldman Sachs and the man behind the BRIC acronym, believes the BRICs are not the same economies, but they share the similarity of being very big in terms of people and are changing their behavioural lifestyle. They are the world’s future. O’Neill had assumed from 2000 to 2050, an average growth rate of around 5.2 per cent for China, around 5.8 per cent for India and below 4 per cent for Russia and Brazil. Goldman Sach’s latest forecasts for 2009 GDP growth still exceed the long-term original assumption.
During the last decade, markets in Brazil, India, and China, experienced their strong run-ups while adhering to the advice that was given to them by the IMF and World Bank following the Long Term Capital Management fiasco, of fiscal and monetary prudence, and are today in a very sound fiscal and monetary condition. All four have amassed sizeable forex reserves; consumers and corporates have under-utilised credit, especially in Brazil and India; banking systems in Brazil, India and China are sound, well-capitalised and negligibly exposed to toxic assets from the G6 credit spill. In addition, stocks are cheap with P/E ratios as follows: India 9X trailing earnings, Brazil, 9-10X trailing, China 12X trailing, and Russia at 2.5X (the cheapest by far).
Although they have performed in line with S&P 500 during the last year (except for Russia), they are in a much better position to recover given their “cleaner” credit fundamentals and the fact emerging markets are expected to continue to drive almost all GDP growth over the next two years, according to the IMF’s January 2009 revision.
The BRICs may have shown stellar performance over the last several years (although their growth has stalled of late in line with the rest of the world), but the old adage still applies : Don’t put all your eggs in the same BRIC basket”.
The author is CEO, Global Capital Advisors
