Photo: Fruggo, Wikimedia Commons
As the global economy shows little sign of growth or improvement in 2013, it’s only natural for investors and economists alike to take a closer look at emerging countries, traditional sources of potential (if not extraordinarily risky) growth and profitability.Perhaps the most well-known of these emerging markets are the BRIC nations – Brazil, Russia, India, and China. Extremely populous, rich in natural resources, loaded with both skilled and unskilled labour, and recent-rapid GDP growth, these countries appear to be, at least to the superficially-informed investor, almost “surefire” sources of high returns.
Not so fast.
As intellectually comforting as it is to think such seemingly low-risk, high return markets exist, it’s necessary to remember that most emerging markets – including all 4 BRICs – are not immune to global downturns (or, in the case of 2013, stagnation).
Here, then, is why 2013 will be tough on the BRIC countries:
Brazil: For many hedge funds and private investors, Brazil has become 2013’s investment market-du-jour. And, really, it all makes sense: a recent population boom (in 2011, the total population in Brazil was 196.7 million, up from 72.7 million in 1960, representing a growth of 170 per cent during the last 50 years), an emerging and growing manufacturing industrial complex, and a boost in production in preparation for the 2014 Fifa World Cup and the 2016 Summer Olympics all make Brazil the “go-to, must-see” target for the investing world. In fact, coming off a slow 2012, Brazil appears to many in the investment world poised for a comeback.
2013 is set to be a difficult year for Brazil. For starters, broadly, the country’s GDP growth trends have been on the downslide for the past few years, from “7.5 per cent in 2010 to 2.8 per cent in 2011 and 1.5 per cent last year,” suggesting that economically, Brazil will trend with (stagnating) global rates this year.
Furthermore, the country’s 2012 employment numbers were grim, creating the fewest new jobs in a decade (1.3MM vs. 2MM in 2011), suggesting a contraction in growth due in part to shifting commodity prices and increased production competition from abroad (a trend that will continue in 2013); even more dire, the world’s 6th largest economy is set to face electricity rations in 2013, in part due to a drought last year that is “threatening electricity generation at Brazil’s big hydropower plants,” a reality that will hamper production and profit this year.
Finally, much of Brazil’s growth (and optimism related to such) has, generally, emerged from the expensive commodities market of the 2000’s (due, in part, to a growing global middle class and erratic weather and manufacturing patterns) that boosted the country’s economic standing. Because “the country has grown largely in concert with surging demand for its stores of oil, copper, iron ore, and other natural resources,” Brazil’s emergence has depended on external factors to grow while simultaneously (and tragically) the government has failed to institute significant internal controls and structures to continue sustainable growth. In fact, inflation may very be the greatest risk to Brazilian growth in 2013 – something for investors to consider when anticipating the Brazilian government’s next actions; while “Brazil’s central bank is committed to bringing down inflation,” government controls – short of imposing shut-downs and rationing – have done little to curb inflation during times of instability. In short, Brazil will pose significant risk to investors in 2013.
Russia: Lurking in the political and economic background of the BRIC growth story tableau sits Russia, the world’s largest energy exporter (oil and natural gas account for approximately 70% of the country’s exports) and, to some, troublemaker. While Russia is set to become “Europe’s biggest economy by 2030,” the World Bank predicts slow growth in 2013 “due to rising inflation, weakening domestic demand, and sluggish external demand.” Since, much like Brazil, the majority of Russia’s recent growth has been tied to rising commodities prices (in particular, oil), Russia in particular sits on the precipice of disaster, should prices shift even moderately.
Furthermore, there’s little chance the Misha Bear escapes the economic and political turmoil hitting the Eurozone without some contraction within its borders. Given that Russia is the third largest trading partner of the EU (and the EU the first trading partner of Russia), as the EuroEconomies continue contracting, Russia will correspondingly see a drop in demand for product and energy, ergo driving down the country’s GDP (which will most likely hit between 3-3.8% growth, based primarily on energy production – a number that would most likely and theoretically hover near 5%, if not for the EuroCrisis), making 2013 slower than predicted.
Finally, Russia faces a significant demographics crisis in 2013 (and beyond): the country with nearly 143MM people (decreasing nearly 1MM people/year, down from a historic high of 148MM in 1992) is growing irretrievably older (while birth rates continue declining), posing significant challenges to the pension and infrastructure systems, already stretched considerably beyond their means. While Russia tries growing in 2013, its ties to the EuroZone, demographic realities, and reliance upon commodities will keep it both unstable and unpredictable an investment target.
India: The uninitiated, predictions of India’s growth (approximately 6%) in 2013 look promising, as experts note that “‘the growth rate of India is less reliant on international factors than is the case for other Asian countries.” The economic devil, however, is, as in all things, in the details. In particular, “‘weaker consumption and investment demand as a result of persistent inflation, high nominal interest rates, large fiscal deficits and political gridlock'” remain – all issues that will continue curbing growth this year. Asia’s #3 economy also faces a significant “budget shortfall, the widest in the BRIC” block of nations, meaning the country’s recent slowdown “has become more structural than cyclical,” which in turn suggests the country can attain sustainable growth only through improved infrastructure projects and a focus on fiscal and current-account deficits, neither moves which the government appears ready to tackle in 2013. In short, the country’s over-reliance on agricultural production, combined with its unstable social network (cultural and religious barriers still hold back significant portions of the country’s population from participation in the broader labour market) and labour forces, will most likely result in an unstable, overly-risky 2013 for investors in the country.
China: This brings us to China, perhaps the sexiest and most publicized/feared BRIC story of the 20th century. Make no mistake: the bloom is off the financial rose that is the Chinese miracle story. 2013 will prove both a pivotal and difficult year for the emerging nation, as political and economic instabilities come to the fore. In particular, look to the country’s debt load to weigh down (it must be noted, un)official growth numbers, as news has recently emerged that “Chinese banks have rolled over at least three-quarters of all loans to local governments that were due to mature by the end of 2012.” And “while the total debt load numbers remain opaque, experts predict them to total between 25-250% of per cent of the country’s GDP,” a number that should put any investor on edge. Furthermore, due in a significant part to the fact that within the past few years “China accelerated administrative approvals for infrastructure investment, notably for building subways, in the middle of last year, in a bid to boost economic growth,” these in-process projects are set to begin dampening growth as early as this year. And while economists predict 8% growth for the nation this year, much of that will be tempered by the EuroCrisis, now in its 4th year, as the region starts grappling with the possibility of a Greek and/or Spanish exit. In short, 2013 marks the year that China starts dealing with the delayed price tag of its unimpeded growth of the last decade, much to the detriment of the world’s investors.
So there we have it. Will 2013 mark the end of the BRIC block of emerging nations? No, of course not. But investors would be wise to understand that no return comes without risk, and, in the cases of the BRIC countries of 2013, one region may pay more risk than reward.
Margaret Bogenrief is a partner with ACM Partners, a boutique crisis management and distressed investing firm serving companies and municipalities in financial distress. She can be reached at [email protected]