Along with the focus on continuing crisis in Europe, the nervousness in global financial markets is being heightened by the signs of weakness in China. And in the Americas, along with the well-advertised manifestations of a slowing U.S. economy, Brazil also has hit a speed bump.
But the other two members of the BRIC quartet -- Russia and India -- also have been subject to spreading weakness. As with China and Brazil, their stock markets fell sharply in the past month along with their currencies (except, of course, the Chinese yuan, whose exchange rate is pegged by Beijing.)
During the global selloff, China's stock market lost 11.4% of its value in May, according to MSCI Indexes, while Brazil fell 14.8% with nearly half of the drop owing to a 6.5% decline in the real. Less attention was given Russia's 21.4% loss in May -- -a bear market in just a month -- and India's 11.9% fall. All of which makes the 6% drop in the Standard & Poor's 500 last month seem almost puny.
Yet as all the accounts of the declines in various markets point to individual factors, they all reflect the slowing of the global economy. To be sure, Europe's debt crisis and the response to it are crushing the economy across the eurozone. China's economy is reacting to the previous restrictive policies to prevent overheating. Brazil, meanwhile, is feeling the effects of the slowing of its key trade partners -- of which, China has displaced the U.S. at the top -- as well as the weakening in commodity prices.
The same forces are hitting Russia, especially the slide in oil. Russia has lived and prospered by soaring oil prices and exports, and now is feeling the effects of the reversal. That's driven the Market Vectors Russia exchange-traded fund (RSX) down a massive 30% from its peak on March 2. The fall in part also reflects the plunge in the ruble, which has fallen 12% in the past month (and has only been stabilized by intervention.)
Falling oil prices are a plus for India, cutting the cost of imports and inflation as well as the tab for government fuel subsidies. But domestic demand had been hampered by tight monetary policy to restrain inflation, caused in part by previously rising imported oil prices. In response to the economy's weakness, interest rates are being cut but the rupee has fallen to a record low.
Jim O'Neill, the head of Goldman Sachs Asset Management who coined the term BRICs more than a decade ago, writes that, notwithstanding its critics, Russia still deserves to be among the pace-setting BRICs. To justify that appellation means it will have to grow 4%-5% over the next decade -- which would mean Russia would contribute more to global growth than the whole euro zone over that span.
To meet this goal, Russia has to avoid the risk posed by a sharp drop in oil prices, which O'Neill thinks is possible. That would necessitate a diversification in its economy, an expansion in the rule of law and have its planned privatizations proceed transparently. While he concedes why many global investors express concerns about Russian governance with the return of President Putin, O'Neill contends this shouldn't disqualify it for inclusion among the BRICs.
As for India, O'Nell admits this is the greatest disappointment. India has the potential for the strongest growth -- 6.9% this decade and 5.3% beyond. But its potential is hampered by variables for productivity and sustainability. Add in India's fiscal and current account deficits and it may be "in line for the kind of ill treatment that traditional emerging markets can experience, and that is currently being dished out to the Club Med countries."
Beyond these factors, the near-term course for these markets will be determined by the direction of the dollar and commodity prices, especially oil. Walter J. Zimmerman Jr., head analyst at the United-ICAP technical advisory, thinks the dollar's rally could be due for a correction and crude oil could bounce. He emphasizes these moves would run counter to his long-term forecasts, but those are the signals from the markets' action, so they shouldn't be ignored.
That could readily come to pass in the event of coordinated action among the major central banks to expand liquidity, from the Federal Reserve moves to boost the flagging U.S. recovery to some euro zone bailout including European Central Bank expansion. Brazil, India and China have been easing monetary policy. Meanwhile, a stabilization of the ruble would grant Russian monetary authorities greater flexibility. The Bank of Japan also would be keen to knock the yen off its high perch.
So, moves to bail out the euro zone and spur growth in other flagging developed economies could power a tradable rally in emerging markets. Some, such as Russia, already have been through "official" bear markets of 20% or more, which could propel them for a bounce when the "risk-on" switch is tripped.
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