About a couple of months ago, I wrote how wrong the consensus is on where within the BRIC universe lies the best potential for change driven by lowering of economic risk premium, and I hope it is not too early for me to declare that markets have delivered as per expectations. The commodity focused markets along with China have and are continuing to see a torrid time. While there is still the feeling that the current market moves are just technical, it is clear that the back of commodity market speculation (including commodity EM) is broken; in fact the whole "QE-driving-prices-buy-commodities-gold" theme looks to be unravelling rapidly even as Japan has announced a fairly open ended (and in some sense a much more aggressive than the US) QE program (joined by renewed easy monetary policy in Europe). In fact there is a severe lack of inflation in developed markets (it's the developing world that is plagued by it). The only thing to tweak is the view on China, which has come out with economic data that is worse than expected and bodes ill for the future - it is mind-boggling to see credit creation at that scale delivering a GDP figure so underwhelming. Combine that with the fact that house price rises in China are not letting up. However, things may not go topsy turvy there yet, though when they do, we are in for a rough ride globally.
It is quite evident that nearly all strategists and market gurus, whatever organisation they belong to, have been caught wrong footed recommending to clients where in the BRICs should they put their capital. We expect future events to prove that they are even more in the wrong. I assume it is either the flawed framework that they have been working with, or the lack of understanding what is really happening in India beyond the aggregates that show up on their screens or, to borrow an ice-hockey phrase, they are too focused on where the puck is rather than where it's going. What's happening with commodity prices is another example of failure of strategists and sell side economists to understand Central Bank action. In my opinion most economists have not understood the impact of QE and its linkage with global markets especially in an environment where banking channels are broken due to financial crises. I expect most strategists are just using whatever analysis they can find to suit their biases to show support from economic theory. And I expect them to be sloppy, or lie.
Brazil's economic situation has continued to deteriorate both in higher frequency releases as well as annual statistics. For 2012 IBGE calculates that share of household and government consumption expenditure has risen even further, making overall consumption expenditure account for nearly 84% of GDP, with capital formation falling further and net exports negative. Inflation data worsened further and for March hit 6.59%.
Russia is in a quandary. With oil prices dropping fast and and the economy struggling to achieve any growth, it is looking towards more spending to revive the economy despite a poor fiscal situation. Some commentators fear the return to Soviet economics, now that Putin has effectively made sure he can last in power as long if not longer than his Soviet predecessors. Gazprom is facing pushback from Europe on expanding its gas supplies and the consumer story in the country, which has till now been a strong support for the economy looks shaky if the extraction and mining sectors start contracting.
How often have we heard that India is pursuing just incremental reform and that its economy is suffering because there is no 'big-bang' reform or liberalisation push? It pays to put in perspective that the 'reform push' in Brazil and Russia is non-existent. Even in China, there is no plan to liberalise industries or welcome more competition. In fact foreign investors in China are forced to come to the conclusion that State actors will dominate the business scene (which is primarily the reason why the globalisation efforts of Chinese companies have and will continue to receive push back from other states). It is tough to see China escape the middle income trap, now that state action through investment spend has brought it to the edge of it. India is acting slowly, but surely, to increase private and foreign investor access in pension, insurance, banking, retail, mining, power and defence sectors. In most other sectors, majority or 100% foreign investment is already allowed. Nowhere else does foreign business have access to such a wide variety of opportunities and an openly competitive environment in a market that is truly of scale! If foreign businesses are still hesitant about India, they should read this.
We continue to be in a low interest, positive liquidity environment and risk assets should do well. It is possible, in the short term even commodity prices will stabilise and EM will get some tailwind from the growing differential in valuations. However, expectations of global growth priced in Commodity EM markets are still too optimistic and that as the sole driver of EM returns is not the future. Improving marginal efficiency of businesses and reducing marginal cost of production is. This is where India should succeed, despite near term political or economic headwinds.
It is quite evident that nearly all strategists and market gurus, whatever organisation they belong to, have been caught wrong footed recommending to clients where in the BRICs should they put their capital. We expect future events to prove that they are even more in the wrong. I assume it is either the flawed framework that they have been working with, or the lack of understanding what is really happening in India beyond the aggregates that show up on their screens or, to borrow an ice-hockey phrase, they are too focused on where the puck is rather than where it's going. What's happening with commodity prices is another example of failure of strategists and sell side economists to understand Central Bank action. In my opinion most economists have not understood the impact of QE and its linkage with global markets especially in an environment where banking channels are broken due to financial crises. I expect most strategists are just using whatever analysis they can find to suit their biases to show support from economic theory. And I expect them to be sloppy, or lie.
Brazil's economic situation has continued to deteriorate both in higher frequency releases as well as annual statistics. For 2012 IBGE calculates that share of household and government consumption expenditure has risen even further, making overall consumption expenditure account for nearly 84% of GDP, with capital formation falling further and net exports negative. Inflation data worsened further and for March hit 6.59%.
Russia is in a quandary. With oil prices dropping fast and and the economy struggling to achieve any growth, it is looking towards more spending to revive the economy despite a poor fiscal situation. Some commentators fear the return to Soviet economics, now that Putin has effectively made sure he can last in power as long if not longer than his Soviet predecessors. Gazprom is facing pushback from Europe on expanding its gas supplies and the consumer story in the country, which has till now been a strong support for the economy looks shaky if the extraction and mining sectors start contracting.
How often have we heard that India is pursuing just incremental reform and that its economy is suffering because there is no 'big-bang' reform or liberalisation push? It pays to put in perspective that the 'reform push' in Brazil and Russia is non-existent. Even in China, there is no plan to liberalise industries or welcome more competition. In fact foreign investors in China are forced to come to the conclusion that State actors will dominate the business scene (which is primarily the reason why the globalisation efforts of Chinese companies have and will continue to receive push back from other states). It is tough to see China escape the middle income trap, now that state action through investment spend has brought it to the edge of it. India is acting slowly, but surely, to increase private and foreign investor access in pension, insurance, banking, retail, mining, power and defence sectors. In most other sectors, majority or 100% foreign investment is already allowed. Nowhere else does foreign business have access to such a wide variety of opportunities and an openly competitive environment in a market that is truly of scale! If foreign businesses are still hesitant about India, they should read this.
We continue to be in a low interest, positive liquidity environment and risk assets should do well. It is possible, in the short term even commodity prices will stabilise and EM will get some tailwind from the growing differential in valuations. However, expectations of global growth priced in Commodity EM markets are still too optimistic and that as the sole driver of EM returns is not the future. Improving marginal efficiency of businesses and reducing marginal cost of production is. This is where India should succeed, despite near term political or economic headwinds.
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