BRICs

The acroynym BRICs was the great theme for the bulls of emerging markets, comprising the four largest emerging economies in the world, each with their own growth dynamic. Unfortunately the bull case for these four economies is now looking distinctly stale. China. China has overinvested in manufacturing capacity with the result that returns on assets is probably negative. This is reminiscent of Asia (Thailand/Indonesia) prior to Asian crisis of 1997. It is likely that the level of bad debt within the banking sector is extremely high although there are no precise figures on this. The authorities are well aware of the problem but they are loathe to tackle the problem head on and they rely on other stimulatory measures to boost the economy. These are not working with the result that economic data out of China will disappoint over the next few months. India. India is running a large current account deficit and is running into reform fatigue. There are some initiatives to boost infrastructure spending which is sorely needed, but again economic growth will probably disappoint over the next few months. Russia. The problem with Russia is political as Putin's position continues to weaken. Putin's problem is that he retains his Soviet instincts of throwing his opponents in prison on trumped up charges, whenever they have the temerity to oppose him. He cannot grasp the notion that for every opponent in jail, there will be 5 more to replace them. In the meantime, the economy is plagued by insecure property rights and capital flight. Brazil. Brazil has been tolerably well run in the last decade and much better than in previous decades and also compared to Argentina and Venezuela. Unfortunately, it needs to be even better run. Its trend rate of growth has been lifted from the 3% to 4% level to 4% to 5%. This is not good enough with teh result that the economy is running into inflation problems even at relatively low levels of growth. That is the bad news. The good news is that there are other large emerging economies in this world to invest in and each one should be viewd on its own merits. There is no easy way of making money in this world and a blanket enthusiasm for emerging markets and the BRICs in particular was not one of them.