To BRICS, big sporting events attracts investments

Hosting a major sporting event is a good opportunity to attract investments and help the local economy. According to research from the Grant Thornton International Business Report (IBR), 54% of the BRICS’ business leaders believe major sporting events are important in attracting investment to their economy. Brazil, Russia, India and South Africa show big faith in sport’s ability to deliver investment (the exception is China)

Among BRICS, business leaders from Brazil are the most optimistic ones. The country—which is going to host the 2014 FIFA World Cup and 2016 Olympic Games—show the greatest faith in sport’s ability to deliver investment: at least 83% of Brazilian entrepreneurs say these events will attract investments to the country. In Latin America, almost three quarters (74%) of business leaders believe major sporting events are important in attracting investments to their economy.

In India, the results are not so different. According to the study, 63% of the Indian entrepreneurs think mega sporting events attract investments while in Russia the rate is 62%. Business leaders in South Africa—which hosted the FIFA World Cup 2010—are also positive (78%). On the other hand, in China—which hosted the Olympic Games in 2008—only 38% of the business leaders believe major sporting events are a good way to boost investments in Chinese economy.

“Holding a major sporting event gives an emerging economy a global shop window, allowing it to present and market what it has to offer to a massive worldwide audience”, says Stephen Gifford, Chief Economist at Grant Thornton UK. “For more established economies, international sporting competitions are still a great opportunity, but appear to be just one element of a much bigger offensive to attract investment.”

By contrast, fewer businesses in the European Union (only 42%) believe hosting big sporting events can increase investments in their country, while in North America the rate is 44%. According to the study, among G7 countries, just 36% think major sporting events can attract investment.

To Chief Economist at Grant Thornton UK, this difference between emerging markets and developed countries can be easily explained. “It’s also more often the case that developed economies will have the venues, transport and technology infrastructure already in place for any major event. Capital investment to build new infrastructure is therefore much more limited in these economies, compared with the level of investment required in emerging markets such as China and Brazil,” says Gifford.

It’s important to note that although United Kingdom is one of the G7 countries, British businesses leaders are more enthusiastic than their counterparts. According to the study, 61% of them say big sporting events are important for attracting investment. The report says the UK government anticipates that the London Olympics will bring £13bn of economic benefits over the next four years—£6bn in the form of foreign direct investment.

“A big part of winning the race to host big international sporting events is convincing the public and businesses that the benefits will outweigh the obvious costs”, says Gifford. “Our research suggests that developed economies have to work a lot harder than emerging economies to make a convincing case.”

http://www.internationalbusinessreport.com/Press-room/Q2_sport_investment.asp

BRICS are not imune to a eurozone collapse

Although BRICS are not at the top of the ranking of countries most exposed to Euro, they are not immune to a eurozone collapse. According to a study by the British consulting group Maplecroft, Brazil, Russia, India and South Africa can be all classified as “high risk” countries with any worsening of the Euro crisis. In the BRICS’ group, China is the only one which was rated as “medium risk”.

The study ranked 169 countries outside of the eurozone according to their level of trade and foreign direct investment with the Euro area. Bank claims of eurozone countries and domestic economic resilience indicators—such as fiscal balance, public debt, levels of inflation and foreign reserves—were analyzed as well. To measure how exposured a country is, Maplecroft elaborated an index and rated the countries in five categories:  “extreme risk”, “high risk”, “medium risk”, “low risk” and “no data”.

To Maplecroft, the BRICS economies represent a potential offset to the negative impact of the euro zone economic crisis due to their importance in global markets. “Nevertheless, these economies are not fully insulated from the slowdown themselves due to trade and investment relations with Europe and an escalating eurozone crisis could further exacerbate current domestic slowdown in growth forecasts across the BRICS”, says the study.

According to Maplecroft, South Africa is rated in the 49th index position followed by Russia, in the 50th. Brazil is in the 62nd, while India is classified in the 85th. They are all classified as ‘high risk” countries in the index. On the other hand, China (112) is rated as “medium risk”.

United Kingdom tops the ranking of countries most exposed to the Euro crisis due to the UK’s high level of economic integration with the countries using the Euro. Besides, the country has a lack of domestic resilience to an economic slowdown.

With the International Monetary Fund (IMF) predicting GDP growth of just 0.7% in 2013, the outlook for the eurozone remains precarious and any further slowdown for the region would have the most severe impact on United Kingdom struggling economy, says Maplecroft. According to the study, a potential collapse of large euro economies such as Spain or Italy would reduce the UK’s trade by approximately 7% and prompt losses around £95bn (7% of GDP) in Britain’s banking sector.

The UK, along with Poland, Hungary, the Czech Republic, Mozambique, Sweden, Denmark, Morocco and Côte d’Ivoire, are among 17 countries classified at “extreme risk” by Maplecroft’s Eurozone Exposure Index (EEI). The United States is rated as a “high risk”, while Canada is considered a “medium risk” country to any worsening of the crisis.

According to Maplecroft, African nations also emerge among the most at risk in Maplecroft’s study, with Mauritania (5), Mozambique (6), Mauritius (7), Morocco (12),  Côte d'Ivoire (16) classified at “extreme risk” due their high trade dependence with the euro area and low resilience against global economic slowdown.

Maplecroft's Eurozone Exposure Index 2012

http://maplecroft.com/about/news/eurozone-exposure-index.html

BRICS' companies are freezing IPOs

Companies in emerging markets are freezing their plans to sell shares in stock exchanges. Still pretty dependent on the foreign investors, organizations from BRICS–Brazil, Russia, India, China and South Africa–are canceling their initial public offerings. 

While developed countries around the world suffer to put their economies on growth track again and emerging markets try to reduce their slowdown, the stock markets are struggling to provide gains to investors. As a result, companies have been decided to wait for a better opportunity to do share sales.

According to Bloomberg, Brazilian companies are canceling initial public offerings at the second-highest rate among the biggest emerging markets. The slowdown in Brazilian economic growth rates makes the country’s benchmark stock index (Ibovespa) the worst performer among BRICS in 2012 until now.

Three IPOs in Brazil were cancelled this year, while seven were announced – which means more than 42% of cancellations. India, for its part, cancelled less than a third of offerings this year while China had zero withdrawals. Russia is the worst in ranking: one initial share sale was done as well as one cancellation.

Louis Dreyfus Holding BV’s Biosev, a sugar-processing unit, became the latest company to withdraw its initial share sale in the Brazilian market. The organization canceled a 1.14 billion-real offering last week due to the “market uncertainties.”

The Bovespa stock index has dropped more than 23% this year’s since its peak on March 13 as Europe’s debt crisis worsened, prices for commodity exports fell and analysts cut their economic growth forecasts to the weakest since 2009, says Bloomberg.

Two of the three offerings completed in Brazil this year – from car-rental Cia. de Locação das Americas and furniture-maker Unicasa Indústria de Móveis – were priced below the lower end of the companies’ targets. The biggest IPO in Brazil this year was completed by Grupo BTG Pactual, the investment bank led by billionaire Andre Esteves. The bank had raised 3.23 billion reais in April. Brazilian companies raised a combined 3.88 billion reais ($1.89 billion) in 2012 through IPOs, down 40% the same period a year ago.

Investors have been questioning if Brazil is facing just in a cyclical slowdown or the situation is more serious. According to the growth forecasts elaborated by International Monetary Fund (IMF) for BRICS in 2012, Brazilian economy might growth just 2.5%, while China is struggling to grow as fast as 8%. 

Is important to note that investments in Brazil aren’t as attractive as China because the currency is overvalued and there’s too much government intervention in the economy, said Mark Mobius, the executive chairman of Templeton Emerging Markets Group, in a Bloomberg Radio interview on July 18.

In China, 261 companies have announced plans to sell shares for the first time this year. In India, six IPOs were withdrawn, while 21 have been announced. In Moscow, Interfax Russia announced plans for an IPO in February, while engineering company EMAlliance canceled plans for a sale.

http://www.bloomberg.com/news/2012-07-24/brazil-s-scrapped-ipos-follow-worst-stock-rout-in-brics.html

Russia fights against inflation

In a battle against inflation, Russia’s central bank decided today to widen the ruble band trading for the first time this year. The measure is an attempt to control the rising prices and to keep the inflation target. Bank Rossii expanded the band in which it allows the ruble to trade against its target dollar-euro basket to 7 rubles from 6 rubles.

The Bank of Russia manages the ruble in a trading band versus a basket of dollars and euros. So, Bank Rossi buys foreign currency when the ruble strengthens or sells foreign currency to support the ruble when it weakens. The Bank of Russia twice widened the trading band last year.

“Increasing the potential flexibility of the exchange rate through the measures taken will help increase the effectiveness of interest-rate policy used by the central bank to provide price stability,” the Moscow-based regulator said in the statement. So, the ruble’s corridor was widened to 31.65 to 38.65 versus the basket, which remains made up of 55 percent dollars and 45 percent euros.

The Russian central bank also lowered the amount of interventions it will conduct before moving the corridor's boundaries. It will now shift the corridor after buying or selling $450 million worth of foreign currency, while the previous amount for a trading band was $500 million.

The changes are implemented in the context of the gradual transition to the inflation targeting regime which according to the "Monetary Policy Guidelines in 2012 and for 2013 and 2014" is stated as the Bank of Russia's priority in the middle term perspective. Russia's target inflation is between 5% to 6% this year.

According to the Russian government’ forecasts, the country's economy may expand at a faster pace than expected this year. "There are a number of signs that the economy is really growing somewhat faster than we had planned - the rapid growth of investment and decent figures for the manufacturing industry", said this week the country's economic development minister Andrei Belousov. Preliminary data shows that gross domestic product increased 3.9% in the second quarter, and 4.4% overall in the first half.

In terms of balance sheet, Russia has around $500 billion in foreign exchange reserves and relatively little government debt. However, the country has the challenge to to diversify its commodity-driven economy. Oil and gas provides around half of both exports and federal budget revenues, making fiscal stability vulnerable to commodity prices.

BRICS: a terrible hangover

After toasting the world with high economic growth rates from 2003 to 2010, the BRICS countries (Brazil, Russia, India, China and South Africa) are having a terrible hangover. An article published by the British magazine “The Economist” this week puts on spotlight the descending economic growth forecasts elaborated by International Monetary Fund (IMF) for BRICS in 2012—except for Russia, where the growth rate has been keeping.

First of all, China is struggling to grow as fast as 8% while India is more focused on reducing inflation. In the case of Brazil, only 15 months ago, the IMF’s forecasters expected the country would grow by over 4% this year. However, last week their 2012 forecast was just 2.5%. Over the same period, South Africa’s 2012 growth forecast was cut from 3.8% to 2.6%. “None of the biggest emerging economies stands on the edge of a dramatic financial precipice, like their counterparts in the euro area, or a fiscal cliff, like America’s. But their economic prospects have nonetheless started to head downhill”, says the magazine.

According to “The Economist”, some of this slowdown can be blamed on events elsewhere. “The European Union remains the biggest foreign market for many emerging economies, buying about 19% of China’s exports and 22% of South Africa’s.” Another thing is that some emerging markets policymakers were nervous about price pressures or property bubbles and they adopted measures to reduce growth and keep inflation on track.

But the slowdown is not simply a demand-side phenomenon, says the British magazine. The underlying rate of sustainable growth may also be less impressive than previously thought.

So, is this the end of the dream? Not yet, according to “The Economist”. By 2010, the combined dollar GDP of the BRICs was already about 75% bigger than Goldman Sachs foresaw when it made its original projections seven years earlier. “The big emerging economies may never again grow as fast as they did after 2003. But the BRICs scenarios did not assume they all would. In its latest projections, released last year, Goldman Sachs envisioned average growth for the rest of this decade of 5.2% in Brazil, 5.4% in Russia, 6.3% in India and 6.9% in China. It now looks as if Brazil and Russia may fall short of this projection. But China and India can still dream of fulfilling it”, says the magazine.

It’s important to remember too that emerging economies have amassed high levels of foreign-exchange reserves, which is a guarantee against a currency crisis. So, if foreign capital were to withdraw abruptly as it did 15 years ago, the effects would not be as ruinous.

Analysts are expecting a slowdown in the emerging markets growth ratio, but they say there are quite a few chances of a turnover. Besides, it’s important to consider that the emerging markets economies are going pretty well comparing to the developed countries.

After an economic growth boom, it is natural that countries face a slowdown. The problem is the fight against corruption and the investments in infrastructure were pushed aside during the fast growth period.  Most of the countries haven’t done the necessary changes to achieve a sustainable economic growth in the future. So, maybe it is time to pay the bill.

http://www.economist.com/node/21559336

What investors can wait for the next months?

Policymakers will have a major influence on investments in the next months, and investors must concentrate their attention on it. These are some of the conclusions investors can take from a reported released this week by BlackRock, who has more than US$3.6 trillion in assets under management. The report—called “Standing Still ... But Still Standing - Update of Our 2012 Outlook—shows the second half of 2012 is going to be dominated by three factors: policy, policy and policy. And, in terms of global growth, the risk of stagnation has increased.

First of all, European policymakers are working to end a three-year debt drama and trying to resuscitate growth. Secondly, the US faces a fragile economy while Japan is experiencing a strong currency and trade deficits. Finally, in emerging markets, China is trying to move toward a consumption-driven economy while keeping up growth. Brazil is easing monetary policy to re-ignite growth and India faces big deficits. So, global corporate earnings appear to be weakening.

The big question is whether policymakers can avoid a global recession scenario. According to the BlackRock analysts, the probability of stagnation has increased. “Slowing growth across the world and market skepticism over policymakers’ responses have increased the odds of our ‘Stagnation’ scenario to 40-45 percent (from 15-25 percent). This is characterized by anemic growth in the developed world and risk-on/risk off trading”, says the report.

To the asset management firm, China is still a puzzle and it is facing a challenge to shift to a consumption economy without losing growth. “There are tentative signs Beijing’s recent easing and stimulus measures could have an effect, and receding inflation gives policymakers room for a lot more.”

According to BlackRock, most of the emerging markets (except India) appear to have enough tools to re-ignite their domestic growth—although many remain dependent on exports to the developed world—and they still have investments opportunities to investors. “Many emerging markets (…) now trade at a 20% discount to developed markets – a level that historically has been the launching pad for performance.” To BlackRock analysts, policymakers in emerging markets have the maneuvering room to actually increase spending and cut interest rates.

Yet the global picture is not pretty. The eurozone’s economy is slumping at the same time the US and Japanese economies are weakening. China’s stimulus is still on focus, while Brazil and India are on a downhill trajectory. “The impact of lower energy and commodities prices had yet to be felt”, says BackRock.

The good news is European governments have decided to recapitalize weak banks in Spain—a move long opposed by Germany. “This shows policymakers realize the banks are the eurozone’s Achilles heel.” The move to promote the European Central Bank (ECB) to become a regional bank regulator faces political challenges, but also has the potential to stabilize fragile sentiment. “The devil will be in the details—which are still sketchy. European policymakers are good at making pronouncements, but so far have proved less adept at implementation”, says the report. To BlackRock, the recent Greek elections have reduced the prospects of an imminent and messy “Grexit,” a departure of the country from the eurozone.

About the US, the analysts have been worried. Job growth has stalled. Another piece of bad news is the fact that the American national savings rate has dropped 13% in the first quarter. “Such declines have precipitated a fall in personal consumption in the subsequent quarter 75% of the time since 1960.”

In terms of investments opportunities, BlackRock recommends investors take a direct exposure in multinationals with extensive revenues in emerging markets. Fixed income securities such as corporate bonds and emerging markets debt look safer. “Duration is shorter and higher yields provide a nice safety cushion against price declines”, says the report.

Emerging markets: a hope for investors

Emerging markets are still a hope for global investors. According to the last Bank of America Merrill survey with fund managers around the world released today, global investors remain overweight in emerging markets equities - a net 19% are still overweight in these countries. However, the number is lower compared to the first half of this year and slightly below the long-term average of 26%. And, for the fourth consecutive month Asia investors report more optimistic expectations for Chinese growth over for the year ahead.

The bad news is manager’s sentiment has deteriorated further despite a rally in equities and commodities since the last Bank of America Merrill Global Fund Manager Survey in June. Although a combination of 11 global rate cuts since the start of June and policy stimulus, fund managers remain conservative in their behavior. Investors continued to revise their expectations for global growth over the next 12 months (net 13% expect global growth to weaken) and maintain defensive allocations in July. 

On the other hand, two unexpected rate cuts out of China and pro-growth rhetoric from leaders have buoyed Chinese growth expectations. A net 6% of Asian investors now believe the Chinese economy will be stronger in 12 months time. Though investors may be more constructive on Chinese growth over the next 12 months, they still reduced their exposure to Chinese equities. In July, fund managers were neutral on China – the lowest weight since October 2010. Nevertheless, the sentiment on Russia and Turkey has improved: these two countries were the largest net overweight positions this month. 

According to the BofA Merrill Lynch survey, Russia is the favorite market for emerging market investors - 36% of the respondents pointed Russian market where there are better opportunities, followed by Turkey, Korea and Brazil.

The research was conducted from 6^th to 12^th July, and 261 executives participated of the global survey. The figure shows investors maintained their “risk-off” positioning in July with still lower equity allocation and high cash balances (4.9%).


Fund Manager Survey Global

Fund Manager Survey Global Emerging Markets

China GPD: nothing to celebrate

China’s gross domestic product expanded 7.6 percent last quarter from a year earlier, the slowest pace since 2009. At first glance, this is a bad news since shows it will be difficult to the country revert the economic global weakness compensating the fragil demand from Europe and the United States. However, the GDP slowdown was in line with the analysts expectations.

But the lower Chinese demand could affect other Asian economies, which supply the country with commodities, as much as the oil, coal and iron ore producers such as Brazil and South Africa, for instance. Canada is pretty exposed to Chinese economy too. Last year, Canada exported C$ 16,788 billon to China – 30% were woodpulp and ores.

The figures released last week shows Chinese economy is slowing faster than the government would like.  Some days ago, Wen Jiabao, premier from China, said Chinese economy faces downward pressure, and suggested the country can introduce more stimulus to keep growth on track, which might help to mitigate concerns. The People’s Bank of China on July 5 announced the second interest-rate cut in a month, adding to the first since 2008.

In some extend, the slowdown on Chinese economy occurs because the country decided to embrace different kinds of measures to avoid inflation, which rates were growing fast. According to a report by Haibin Zhu, Grace Ng and Lu Jiang, economists from JP Morgan, China GDP is going to improve significantly since August.

But the slower China GDP growth shows the country’s economy is taking a soft landing as the Chinese authorities and all the economists are expecting. Besides that the loans have advanced 16% in the country in May. Then, some economists believe China is not as disastrous as people have been feared. So far, there’s nothing to be horrified, but there’s no reason to celebrate as well.

Spotlight on BRICS

The financial acronym BRIC - which means Brazil, Russia, India and China - was coined in 2001 by Jim O'Neil, chairman of Goldman Sachs Asset Management (GSAM), who wrote a paper entitled “Building Better Global Economic BRICs”. In that document, O’Neil suggested economists and investors should pay more attention to the four larger emerging market economies which would have a faster GDP growth rate higher compared to the G7 countries. According to him, BRIC economies have the potential to transform the global economy over the coming decades and will overtake G7 economies by 2027. Last year, South Africa was added to the acronym forming the BRICS. 


What does make these countries so special? First of all, their size and population which means more consumers and investments to support the growth consumption. The four original countries in the acronym, combined, have more than a quarter of the world's land area and more than 40% of the world's population Secondly, especially in terms of Brazil, China and South Africa, they are big commodities producers, while Russia is a huge oil producer. India, on the other hand, has its economy basis more concentrated in technology. 


Besides that BRICS countries have all the necessary conditions to sustain high growth rates since the economic interaction between these nations has been increasing. India and China have been acting as a kind of the engines of growth which means they are demanding more commodities and energy. On the other hand, Brazil, South Africa and Russia supply China and India needs which results in a virtue circle. So, Brazil has seen as the commodities warehouse, as South Africa, however in lesser extend; Russia, the energy store; India is the service centre; and China the trading giant. 


According to the chairman of Goldman Sachs Asset Management (GSAM), BRICS can represent close to 40% of global GDP by 2050 and have become four of the world’s top five economies.


http://www.goldmansachs.com/our-thinking/topics/brics/brics-reports-pdfs/build-better-brics.pdf