BRICwall

Our commentary of mid-May of this year, entitled “Falling Like a BRIC,” highlighted the under-performance of this asset class, relative to World stocks in general, since way back in 2011.

Four months on and a lot has happened within the emerging market space, including the BRICs, although a peek at the first chart doesn’t suggest so.

weekly_blog_130912_01

Yes the stand-out has been South Africa, with the rest effectively level, albeit that like their developed market cousins, it’s been a bumpy rise since the Fed hint on tapering first emerged in late May.

However, the above is in “local currency terms,” and something big has happened of late. There has been a run on emerging market currencies and in particular the three Rs, the real, the rupee and the rand, as can be seen within the second chart, showing the BRICs in $US terms.

weekly_blog_130912_02

Global liquidity has tightened as investors have become jittery on bonds of all stripes, hence they have been yanking money out of emerging markets and in particular ones with large deficits in their current accounts. Brazil’s central bank has raised its key rate by half a percentage point for a third straight meeting, to 9%, as a plunge in the currency undermines its efforts to slow inflation whilst announcing a $US60 billion intervention plan to help buoy the currency. India’s faces even bigger problems as global liquidity tightens, a combination of large fiscal and current-account deficits, high and persistent inflation, sizable un-hedged corporate foreign borrowing, and a reliance on portfolio inflows. China has held up so far, thanks to its large foreign reserves, whilst Russia retains its advantage of a relatively high oil price.

A final chart is an updated one originally shown in May, the FTSE BRIC Index showing weekly prices since January 2006. The blue line is a 40-week, or 200 day, moving average, often used as guidance to support and/or price resistance. Note that the moving average continues to be a barrier to any price advance.

weekly_blog_130912_03

Concerns made by BRICs policy-makers at the recent Jackson Hole, Wyoming meeting of central bankers and at the G20 leaders meeting in Russia, have fallen on deaf ears. As stated by Dennis Lockhart, president of the Atlanta Fed, “You have to remember that we are a legal creature of Congress and that we only have a mandate to concern ourselves with the interest of the United States,” going on to say, “Other countries simply have to take that as a reality and adjust to us if that’s something important for their economies.”

In $US terms, which is of more importance to international investors’, the BRIC Index has enjoyed a bounce of late, outperforming the developed world. However, the red-dashed line remains a BRICwall to be respected, so more patience would be prudent.

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One response to this post.

  1. […] September’s, “BRICwall,” update we also commented on the run on emerging market currencies and in particular the three […]

    Reply

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