martes, 25 de junio de 2013

martes, junio 25, 2013

HEARD ON THE STREET

June 23, 2013, 8:28 p.m. ET

Emerging Markets Are on Their Own

By ANDREW PEAPLE
 
[image] Reuters (left and right); Agence France-Presse/Getty Images (center)
 
 
Slower economic growth in emerging-market countries forms the backdrop to rising popular discontent.
 
It is high time investors demerged emerging markets.
 
Protests on the streets of Brazil and Turkey, a cash crunch in China's financial system, strikes in South Africa: These all indicate rising stress in developing economies. Add in signals the Federal Reserve may soon scale back its bond-purchasing program, and things are looking ugly for countries that have delivered about 75% of global growth over the past decade. 

After a decade or so in which emerging markets reliably juiced the global economy, this is a wake-up call for investors. 

These countries vary in terms of economic and political development. Protesters in different places have particular grievances, from Brazilians facing higher bus fares to Turks fearing the destruction of a park. 

But since the turn of the century, investors increasingly have treated emerging markets as a single asset class, collectively borne aloft by favorable trends, such as China's emergence into the global trading system. 

Concepts such as the Brics countries—originally Brazil, Russia, India and China, later joined by South Africacemented the idea that developing countries could be treated as one.
 
Such ideas proved rewarding: Emerging-markets stocks, foreign exchange and credit returned 19%, 6.8% and 11%, respectively, from 2003 to 2010, compared with a 4.1% return for the Standard & Poor's 500-stock index, according to Goldman Sachs GS -2.25%.
 

The supportive tailwinds are slackening now, exposing underlying weaknesses.
 

Take exports. Selling goods to credit-fueled developed countries helped emerging markets narrow their trade deficits and boost employment, especially before the global financial crisis. But this dynamic has stalled. The preliminary reading for new export orders on the HSBC HSBA.LN -0.91%Markit purchasing managers' index for China fell to 44.0 in June, with a reading below 50 indicating contraction. 

Clearly, Europe's moribund economy is hurting trade. But even the relatively sustained recovery in the U.S. is proving less helpful than expected. 

As UBS UBSN.VX -2.22% strategist Bhanu Baweja points out, recent growth in the U.S. has centered on industries such as construction, autos and energy. These are sectors in which the U.S. is either pretty self-sufficient or reliant more on countries like Germany for supplies. There is less robust demand for products like electrical goods, 11% of all emerging-markets exports, or clothing, which accounts for 4.2%. This has weakened the usually strong link between U.S. and emerging-markets growth.
 

China's Janus-faced position has exacerbated emerging nations' problems. Like its peers, it gained when exports to developed economies were strong. Its own investment boom, meanwhile, juiced commodities prices, which benefited those nations that export them, such as Brazil. Now, China's growth is slowing and Beijing wants to curb the economy's reliance on fixed-asset investment. 

Slower growth forms the backdrop to rising popular discontent. Turkey's gross-domestic-product growth rate was 2.5% last year, down from 9.2% in 2010; Russia, which saw mass protests last summer, has seen growth slow to 3.4% from 4.3% in 2010 and 2011. Brazil's also slowed sharply in the same period. The International Monetary Fund just cut its Russian growth forecast for this year from 3.4% to 2.5%. 

The unrest suggests governments didn't do enough to tackle underlying problems during the good times. All of the Brics countries have fallen in Transparency International's Corruptions Perception Index in the past decade. And while labor productivity growth for emerging countries remains faster than for their developed peers, the gap has narrowed in the past three years, the result of a slowing pace of economic overhauls, Mr. Baweja suggests.
 

Data on inequality are less conclusive. The Gini coefficient measures wealth disparity. In Brazil, it fell to 0.51 in 2011 from 0.55 in 2004, according to the Socio-Economic Database for Latin America and the Caribbean, indicating the gap between rich and poor narrowed. But that is still well above the average of about 0.3 for members of the Organization for Economic Cooperation and Development.
 
The problem for countries like Brazil is that when times get tougher, disparities come into sharper focus. That raises political risk premiums, which fell through much of the first decade of this century. 

Already, since 2011, emerging-market stocks' annualized return has declined to a negative 6.3%; for foreign exchange, it is now a negative 0.8%. Credit has remained relatively buoyant, up 7.3%. Still, the S&P 500, with a return of 12%, has outgunned them all. 

Rising Treasury yields will exacerbate this trend by pulling more investor dollars there even as developing countries that have become reliant on external financing, notably Turkey and South Africa, look particularly vulnerable. China's financial crunch has resulted partly from a sharp reduction in capital inflows from abroad and mounting concerns about bad loans after a multiyear credit binge. 

Volatility has reared its ugly head already, leading Brazilian building-materials company Votorantim Cimentos to pull a multibillion-dollar initial public offering, and Russia to cancel two government-bond auctions in recent weeks. 
 
Acquisitions targeting companies in BRIC countries have fallen 16% year on year in 2013, to $155.2 billion, the lowest year to date since 2009, according to data provider Dealogic. 

The center can't hold: "The notion of wanting broad exposure to emerging market assets is likely to be a lot less appropriate than it was a decade ago," as Goldman Sachs, which coined "BRIC," puts it.

Countries with large current-account deficits and heavy reliance on commodities, such as Brazil, could prove shaky. But all the Brics countries must grasp the nettle of overhaul before they can be viewed as safer long-term bets. It is unfortunate that they must now do this during a decade that looks much harsher than the last one. 

 
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