BRIC’s future shines in 2013

There is a light at the end of the tunnel for investors next year, and this light is particularly bright for emerging markets. According to a report elaborated by Schroders, a British multinational asset management which operates in 26 countries, the global growth is likely to continue to struggle in the next year given the headwind from fiscal policy in the advanced economies, but 2013 might be a stronger year than 2012 in the emerging world.

For Schroders analysts, the emerging markets—especially the four BRIC countries (acronym to Brazil, Russia, India and China)—will face stronger activity next year, although the economic growth will likely remain below potential. “We believe the recent rebound in activity in the emerging world, particularly China, has enough momentum to generate a bright start to 2013; but we remain cautious that much of this is down to the global inventory cycle, and that final demand remains weak,” says the report.

In terms of China’s economic growth, it might sum 7.7% in 2012, but investors should be aware of the Chinese activity since a significant part of the country’s recovery might be driven by a favorable stage of the global inventory cycle and the final demand, which remains weak.

“Additionally, it seems that the official growth target of the Chinese government has become a more reliable indicator of policy measures,” says the report. “In previous years, it was not unusual for the target to be exceeded by several percentage points, but it seems the new target of 7.5% per annum reflects a more realistic assessment of the Chinese economy, and this has implications for the likelihood of stimulus measures being enacted to maintain the target growth rate.” According to the Schroders’ forecast, China might grow 8% in 2013, below the 8.1% market-consensus.

Brazil has experienced a recovery in the macro data in the second half of the year. For the Schroders’ economists, the largest Latin America country might grow at least 1% quarter to quarter in both the third and fourth quarters. “Though we should see growth nudge down a tick as 2013 wears on, it should remain robust throughout the year,” says the report. The firm estimates that Brazil will grow 3.6% in 2013, much more than the 1.5% estimated for this year. “Looking ahead to 2014, we expect continued improvement to a shade over 4%. The FIFA World Cup, held across Brazil in June-July 2014, should also boost activity.”

Brazil has been using all kinds of monetary instruments to revive its economy, and the Brazilian Central Bank has been reducing rates sharply. Over the past year, the monetary authority cut the country’s interest rate by 500 basis points, more than any other group of the 20 nations. Today, the Brazilian benchmark interest rate is 7.5%, a historic low level.

“With so much easing having taken place, we expect the BCB to maintain the current policy rate at 7.25% for some time, unless outside shocks create significant deterioration in the macro outlook,” says the Schroders’ report. “It is likely, however, that the strengthening of activity and the depreciation of the Real earlier this year will put upward pressure on inflation throughout 2013.”

The economic activity in Russia, on its extent, has been facing a slowdown in the second half of the year. The recent signs, however, suggest that this slowing may have stabilized, and Schroders estimates that Russia’ Gross Domestic Product (GDP) will grow 3.5% in 2012. “Activity is unlikely to be helped by the Russian Central Bank (CBR), arguably the most hawkish in the world at this time, having raised rates in September just prior to inflation breaching its official target,” says the report.

India is the only one within the BRIC countries which can frustrate investors. According to Schroders, the activity in India will continue to be muted and disappointing. “Getting a strong grasp on the Indian economy can be challenging, as data is often poor and subject to very large revisions,” says the report. “It is clear, however, that the global slowdown has affected India, with growth so far this year slowing below 6% for the first time since 2008-9.”

India’s GDP might grow 5.6% in 2012. For Schroders, India will continue to face “an unpleasant cocktail of institutional, structural and cyclical headwinds to growth”, says the report. “One major barrier to an improvement in the cyclical outlook for India has been the persistence of high inflation, and the reluctance of the Reserve Bank of India (RBI) to ease policy as a result.”

An island of illusion

The United States fiscal cliff has been dominating the financial market’s attention around the world. Many investors have been questioning where to put their money while the scenario becomes clearer. Some economists say emerging markets might be an interesting investment strategy, especially the BRICS countries (acronym for Brazil, Russia, India, China and South Africa). But are the BRICS nations really a refuge for fiscal cliff?

First of all, it is important to understand what is the so-called fiscal cliff and its impact in the United States economy. The fiscal cliff is the combination of expiring tax cuts and government spending cuts. Without congressional action, up to $600 billion of expiring tax cuts, new taxes, and automatic spending cuts are set to take effect at the end of 2012 or beginning of 2013. This means that this combination is a threat to the American economy which can be back into a recession.

According to the American multinational financial services corporation Fidelity Investments’ forecasts, if the expiring tax cuts, new taxes, and automatic spending cuts hit all at once, the impact could amount to as much as 4%-5% of the United States Gross Domestic Product (GDP). As a result, “some experts anticipate the economy would experience a significant slowdown and there would be major consequences for financial markets,” says Fidelity.

In this context, some analysts believe emerging markets—especially the BRICS countries—might be a refuge to investors since these countries do not have a fiscal cliff and their balances of payments are in good shape. For Antoine W. Van Agtmael, Ashmore Emm founder and author of "The Emerging Markets Cenutry", it is time to think risks in a different way. 

In an interview with Bloomberg, he emphasized that the debt/GDP (rate) in emerging markets is better, as long as their consumer level and economic growth. Although the emerging markets have been facing an economic slowdown, most of them will continue to grow more than the developed countries. Van Agtmael aso said that he was optimistic about the United States, and that investors should keep their portfolio diversified.

The emerging markets are not immune to the United States fiscal cliff impacts. These nations do not constitute an isolated island. It is clear that, in a globalized world, it is an illusion to think that these major emerging markets might perform well in the worst scenario compared to the American economy. The perspectives of these countries might be better in relation to the developed countries, but the sky does have clouds.

Companies focus expansion plans on BRICs countries

Brazil, Russia, India, China are inspiring more investment confidence in terms of business. According to a research conducted by accountancy firm BDO, half of chief financial officers (CFOs) from medium-sized companies are now investing in or planning to enter these markets, compared to only three out of ten in 2011.

Over 1,000 CFOs from mid-sized companies across 14 markets were interviewed. The report only refers to Brazil, Russia, India and China as the BRIC countries, which means the accountancy firm puts South Africa apart from the group.

According to BDO, CFOs are still pursuing international expansion in order to drive revenue, but they are more cautious about where they choose to invest. The “big seven” countries—China, USA, Brazil, India, Germany, Russia and U.K.—lead as the most attractive investment markets, due to size and customer potential, says the report.

China remained the top investment destination, followed by the U.S. Some 69% of CFOs cited China’s market size as a key advantage and 37% were attracted to cheap labor in the country. Brazil has moved up to third position, from sixth in 2011.

“There is a boom in the BRICs—45% of mid-market CFOs are focusing their expansion plans on the BRICs, compared to 29% in 2011”, says the report. According to BDO, the BRIC countries can no longer be termed emerging markets. “They are now seen to be preferred—and known—investment entities”, states the survey.

More than two thirds of CFOs see customer service delivery crucial for international growth, with Brazilian, British and South African companies ranking this the most highly. In terms of revenue, Indian and Russian companies have seen the highest average overseas revenue increases, 18% and 17% respectively, while Brazilian CFOs have reported the lowest increase (5%).

The eurozone crisis, however, is playing an important role, with CFOs from Brazil and China saying that it has had a large impact on their international expansion plans.

Reflecting on the global impact of the eurozone crisis, CFOs from countries both within and outside Europe said their investments were affected: Brazil (58%), China, Germany and India (each 54%), and the Netherlands (50%). The countries least likely to report that the crisis had impacted their international expansion plans are Japan, Australia, South Africa and Canada: around two thirds of CFOs from these countries said the eurozone crisis had had little or no impact.

“Brazil’s increasing investment appeal is now reflected in its top three ranking for general international expansion—it is the third most attractive market in 2012, up from sixth place in 2011”, says the report. “The appeal of Brazil is fairly consistent across the board in terms of sectors, and highest amongst CFOs in France, Canada and USA.”

In China and India, the investments have additional attractions: higher growth rates are a key factor for about half the CFOs investing there, and the cheap labour rate attracts over a third of investors. High growth rates are also important when considering expansion to Brazil. For Russia, attractive profit margins are an important factor, mentioned by over a third of respondents (36%).

In Brazil, a quarter (24%) of CFOs in the professional services sectors are planning to increase their investment in Brazil, compared to 15% overall. Approximately three of ten Chinese and American CFOs are also expecting to increase their investments.

Three of the four BRIC countries are considered amongst the top twenty risky markets; Russia ranks ninth, China thirteenth, and India twentieth (Brazil narrowly escapes, ranking twenty second). This shows that, while BRIC countries are attractive markets for investments, they also come with some risks.

http://static.bdo.uk.com/assets/documents/2012/10/BDO_Ambition_Survey_2012_151012.pdf