Archive for the ‘BRICS’ Category

The world had de-coupled, we were told. Time was, that when the US consumer sneezed, the rest of the world got a cold.

Then in 2008, the US consumer was sent to bed, with a thermometer in his/her mouth, and the rest of the world was in agony.

Then something odd happened. After a few months, in which everyone suffered, the emerging world did okay. China did more than okay, it boomed.  The BRICs, or if you want to include South Africa in that illustrious group, the BRICS, took the baton of growth from the US.

Sure there was talk of currency wars, sure the UK limped along like a cripple on broken crutches, but the global economy did well. It had de-coupled we were told.

Or did it? There are time lags in these things.

Now things seem to have gone into reverse. Sure China is still growing, but it is struggling to change from export to consumer led growth. India is picking up, Brazil looks dire, Russia looks worse, and if you want to make the small ‘s’ at the end of BRICS into a big “S” South Africa  is struggling.

There are signs Japan may be recovering, more of that in another article, the Eurozone is well and truly stuck in a very low gear, or even reverse, but the UK and US are the new stars.

The UK economy slowed a bit in Q3, with quarterly growth down to 0.7 per cent, from 0.9 per cent the quarter before. But then the UK’s main trading partner is the Eurozone. At least investment is rising at a very brisk pace, and that gives good reason for cheer.

But there is even more reason to cheer the US.

The year got off to an awful start, with a cold winter and unfortunate timing of the inventory cycle hitting  the economy hard. Was the Q1 contraction a one-off?   Or was it a sign of something more serious?

Well the data on the US economy has been unremittingly good, ever since.  Take for example the latest US consumer Confidence Index from the Conference Board. It hit a new seven year high in October. If you like your numbers, then you may be interested to know the index hit 94.5. The last time it was so high was in October 2007.


Yet, the global economy still struggles. If it has de-coupled, then right now this is negative thing.

But there is one other issue here.

As the US recovers, the Fed makes noises about upping rates. This is spooking markets, and hitting emerging economies hard.

It is not that the US economy is no longer the lynchpin of the global economy. It still is. It is just that the actions of the Fed seem to count for more than the well-being of the US consumer.

But can the US consumer yet save the day? Only time will tell, but it is surely the case that if US Consumer Confidence continues to grow, then the rest of the world will grow with it – eventually.

p.s. I have been away for a while to complete my new book, called ‘iDisrupted‘ which is available to purchase via Amazon. If you are interested in my thoughts about how the incredible changes in technology are likely to change our world forever then you are invited to buy the book and let me know whether you agree or disagree with my predictions. Further details about the book can be found on

Michael Baxter, The Money Spy


As we slowly move towards a post QE world, or at least post US QE world, things start to look very different. Countries that seemed unstoppable a few years ago look vulnerable. Perhaps the three countries to suffer the biggest knocks in recent days have been Brazil, Turkey and South Africa – all have seen their currencies fall sharply. In two of these countries we have also seen street protests.

Yesterday it was Brazil’s turn to be seen in an unpleasant limelight, as Brazilians took to the street to protest over a multitude of woes – among them the cost of hosting the forthcoming World Cup and the Olympics. Meanwhile credit ratings agency S&P has downgraded Brazil’s sovereign debt outlook – it is still rated as BBB, but now it is under a negative outlook.

Look beneath the surface and the threats to Brazil look worrying indeed.
For one thing, Brazil’s current account has fallen from a small surplus in 2007 to a deficit worth around 2.3 per cent of GDP in 2012. What Brazil needs is more investment, higher domestic savings to partly fund the investment, and a cheaper currency to give exporters an advantage. Alas it also needs much lower inflation. The IMF has forecast Brazilian inflation at 6.1 per cent this year. Interest rates are currently at 8 per cent. To fight off inflation, Brazil needs a strong currency. Do you see the dilemma?

The savings ratio in Brazil is the lowest amongst both the BRICS and in Latin America. Part of the problem is a very generous state pension scheme. This needs to be reduced, but street protestors may not be too happy with that idea.

At face value, government debt in Brazil does not seem so bad. In fact net debt is 35 per cent of GDP. Wouldn’t the US and the UK love it if their equivalent measure was so low? It is just that net debt is made up of gross debt minus assets, and many of the assets that count towards Brazil’s net debt are highly illiquid and risky. Capital Economics reckons a better measure of net debt would be around 50 per cent of GDP.

Brazil is posting a primary budget surplus, meaning government receipts are greater than expenses before interest on debt – but, thank to high interest rates, Brazilian public debt is rising.

And there is a much deeper woe. Commodity prices have been falling of late, and many, including the World Bank for example, are now forecasting a new phase in what’s called the commodity super cycle, as the massive levels of investment into commodities during the up phase of the super cycle leads to greater supply.

The last few years have been characterised by high commodity prices, poor economic performance in the developed world, and cheap money. As we enter a post QE world, it appears we may also enter a phase of lower commodity prices. For Brazil this may be a perfect storm.

This does not mean that the Brazilian growth story is over, but remember markets tend to overreact and Brazil may be one of the big victims of post QE over-reaction.

© Investment & Business News 2013

The US household is cutting debt.

In fact it has cut debt so much, there is even talk that the good old boys (and girls) who constitute the US consumer will soon be well placed to hit the plastic, open up their wallets and purses and spend like they used to. In short, the US consumer may be close to once again becoming the lynch pin of the global economy. That’s good news right?

Oddly, the markets are panicking. There is talk of a bond bubble. Across the developed world many countries are heavily exposed. But is it is the emerging markets, and the BRICS in particular, who seem to be most in danger?

Today’s series of articles delves deeper. Here is the really good news, however; opportunity knocks for those who keep their nerve and can rise above market fashion.

© Investment & Business News 2013

If there is one thing finance ministers and their equivalents from Brazil, Russia and China had in common, it was their criticism of the US policy of quantitative easing. Brazil was especially vocal, and its finance minister accused the US of engaging in currency wars as QE in the US led to a cheaper dollar, and a more expensive Brazilian real relative to the US currency.

Brazil and Russia had two other things in common, however, and that is a threat from inflation, and reliance on the sales of certain commodities. As one effect of QE seems to have been to drive up the price of assets, including commodities such as oil, both Russia and – to a lesser extent – Brazil have benefited from QE via their exports. That QE arguably pushed up the price of both their currencies relative to the US dollar, then US QE may also have helped to lead to lower inflation in both countries.

Since markets have begun to price-in the effect of the US ending QE, the Brazilian real and the Russian ruble have fallen relative to the dollar. In Brazil the government and the central bank have responded by upping interest rates, and reducing Brazil’s tax on foreign transactions from 6 per cent to zero.

In Russia, despite falls in the ruble and the fact that inflation was 7.4 per cent in May – which is well above Russia’s central inflation target of between 5 and 6 per cent – hikes in interest rates are not thought likely.

Of more concern is Russia’s reliance on oil and gas. In projecting its latest budget, the Russian government assumed an oil price of $105 per barrel. The IMF projects Russia’s fiscal deficit to be around 2 per cent of GDP in 2014, but stripping oil and gas out of the equation means the deficit is likely to be around 12 per cent of GDP.

If the price of oil and gas fell significantly, which is possible in the era of shale gas, while interest rates rose, the Russian economy may be vulnerable to a backlash against emerging market bonds.

Before 2008 the Chinese economy grew without running up massive debts. In 2008 total outstanding credit, as recorded by the People’s Bank, was 130 per cent of GDP. Since 2008, however, according to Capital Economics, outstanding credit in China has risen to 187 per cent of GDP. Capital Economics also stated: “Outstanding credit stood at 195 per cent of GDP in March, an increase of 66 per cent of GDP in little over four years.”

According to the ‘FT’, local government in China has run up massive debts. The ‘FT’ stated: “Provinces, cities, counties and villages across China are now estimated to owe between Rmb10tn and Rmb20tn ($1.6tn and $3.2tn), equivalent to 20-40 per cent of the size of the economy.”

Recently, Fitch credit ratings agency downgraded China’s credit rating. To quote the ‘Telegraph’: “Total credit has jumped from $9 trillion to $23 trillion in four years, an increase equal to the entire US banking system.” George Soros, according the same ‘Telegraph’ article, has warned that there could be a run on China’s entire banking system akin to the collapse of Lehmann Brothers.

In the ‘Financial Times’, Martin Wolf wrote: “The fragility of the [Chinese] financial system could increase very sharply, not least in the rapidly expanding “shadow banking” sector.”

India’s economy has slowed down sharply in recent months, dashing hopes that its growth rate would be even greater than China’s during the first few years of this decade. One of India’s challenges relates to its current account deficit – around 5.1 per cent of GDP in 2012, according to the IMF. This makes India vulnerable to a backlash in emerging market debt.

© Investment & Business News 2013


The BRICS are not what they were. Maybe it is time to look elsewhere.

Take news out this morning. According to Capital Economics, growth in GDP across emerging markets may have fallen to a three year low. Other data revealed that the Brazilian economy grew by just 0.6 per cent in Q1. But despite the lacklustre growth, fears over inflation have forced Brazil’s central bank to up interest rates by half a per cent. Looking at other data out today revealed that the economy of the Philippines grew by 7.8 per cent.

The BRICS have problems. China is struggling to adjust from a growth model that relies on exports and investment to one that grows off the back of consumer spending. In short China needs more internal impetus for growth. Brazil’s problem is the opposite: too much reliance on consumers and not enough investment.

News on the Indian economy has been a disappointment, as the country fails to make the reforms necessary to compete on the international markets. As for Russia, it remains over-reliant on oil and gas and Capital Economics forecasts it will grow by just 2.3 per cent this year.

In contrast, the TIMPs – that’s Turkey, Indonesia Mexico and the Philippines – look a lot more interesting. As indeed does Malaysia, Thailand, Vietnam, Chile, Columbia and parts of Central America – such as Panama.

The stock markets of the Philippines and Thailand have been the second and third best performing in the world during the last two years. (Venezuela was first, but this market is small and very illiquid.)

Stock market growth does, of course, bring with it the risk of stocks rising too high. The Philippines’ stock market is trading on a valuation of around 20 times 2013 earnings, but less than the p/e ratio seen before the Asian crisis in 1997.

The Asian crisis of 1997 rocked the South East Asian region hard. Are we in danger of seeing a repeat of this episode? This time around there is a difference. The savings ratio in Singapore last year was 49 per cent of GDP, and 39 per cent of GDP in Malaysia.

The biggest economy in the region is Indonesia. Some reports have suggested a credit bubble may be forming in the country. It may be worth pointing out that in Indonesia the ratio of credit to GDP is 30 per cent, against an average of nearer 100 per cent for the region. More interestingly, in Indonesia a smaller proportion of credit has funded projects in the property sector, relative to Hong Kong and Vietnam, for example.

As a result there is little hint of a property bubble in the making. Instead, much of the credit has funded infrastructure and manufacturing. In 1997 around 50 per cent of Indonesia’s credit was funded by foreign currencies. Today that level is nearer 15 per cent.

© Investment & Business News 2013