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Much ado about nothing... - Views on News from Equitymaster
 
 
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  • Aug 24, 2004

    Much ado about nothing...

    Much has been written about the BRIC (Brazil, Russia, India and China) nations and a leading firm has gone to the extent of saying that by 2050, India and China are likely to become two of the largest economies in the world. However, currently, these four economies are competing for investments.

    Although the four major developing economies outperformed the developed economies, in terms of growth in FY04, the last three months have witnessed some dramatic changes.

    Let us now analyze the performance of the benchmark indices during the last three months and the factors, which led to the circumstances.

    Brazil:  The Brazilian index has outperformed with a return of nearly 24% during the 3-month period and the main factors, which led to such robust performance, are good earnings prospects and the pension reforms that have been carried out have led to positive sentiments among the investors with foreign capital flowing in. The pension reforms are likely to boost the country's credit rating in the global markets thereby likely to attract capital investments at attractive rates. Further, measures such as taxing the benefits of state pensioners came in as another positive towards the reforms outlook. All this has resulted in positive inflows into the capital markets. However, concerns pertaining to rising inflation as a result of high crude oil prices loom large.

    Russia:  The Russian economy rode high on the back of high oil prices resulting in returns to the tune of 14% during the period. It should be noted that Russia is the largest non-OPEC oil producer with vast reserves and is a major exporter of oil. The 15% rise in the crude prices has helped economists forecast a surplus for the 5th consecutive year. With the increasing export funds, the country would be able to repay its high cost debt and also meet its domestic pension obligations. This augurs well for the economy, which is now anticipating a GDP growth rate of nearly 6.3% in FY05. However, concerns loom large over the country's over-dependence on oil for economic growth.

    India:  The Indian economy performed exceedingly well during FY04, but a change in the government at the center at the turn of the fiscal has led to major policy changes in areas ranging from disinvestments to agriculture. The last three months have resulted in lackluster activity as far as the BSE-Sensex is concerned. Rising inflation (currently at 7.96%) due to high commodity and crude oil prices have resulted in pessimistic sentiments among investors. Further, interest rate hikes. (Which we believe are likely to happen soon), would play a major role in determining as to which avenue gets a major share of the investors' funds. Global interest rates have been heading northwards and in order to retain Foreign Institutional Investors (FIIs) investments, domestic rates have to be hiked. It is due to these factors that we believe that investors have adopted a wait and watch policy as of now. However, strong business fundamentals and economic policies are likely to play a major role in the long-term.

    China:  The Chinese index has performed the worst resulting in negative returns after a dream run during FY04. The government's steps to slow down the economic activity in order to contain inflation and overheating of the economy have resulted into lower capital inflows. Further, China has become the second largest consumer of oil and with prices nearly 15% higher than FY04 average, this is likely to have a negative impact on the economic growth. Although the Chinese economy is the major driving force for Japan and many other Asian countries, concerns over declining demand from the US and high energy prices along with over-building of capacities have led to skepticism.

    The above article suggests that it is not only India, which has been a victim of high crude prices and rising inflation, but also other developing nations that compete for the same dollar of investment. Rising interest rates have put pressure on the Indian economy to increase rates so as to retain capital and at the same time, maintain the current state of development. As a result, we advise investors not to read too much into under-performance of a particular index vis-a-vis others as the macro-economic factors remain the same, just the magnitude of impact varies depending on the economic strength of the country.

     

     

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