The BRIC nations- Brazil, Russia, India and China- have witnessed the longest rally in their stock markets since 1997. Investors have amassed humungous wealth during this period. Now the question is- Will the party go on? Well, the party may go on. But, the music may wane a bit; the lights may go out at times; and the glasses may have more water than wine.
Getting back to economics, rising inflation is the biggest threat looming over the BRIC economies.
China and India have witnessed a significant rise in consumer prices led by rising food, fuel and commodity prices. In Brazil, inflation shot up at the fastest pace in the last one month than it had in two years. The story in Russia too is running on a similar plot.
The central banks of all these emerging economies have been breaking their heads in their vain attempt to rein over the inflationary monster. Since October 2010, China has already raised its interest rates four times. The Indian central bank RBI has hiked rates 8 times in the past 12 months. And there are strong reasons to believe that there will be a 9th hike next month. On similar lines, Brazil has hiked its interest rates five times. And Russia too followed the cue and increased rates in February 2011. And it seems as if the central banks have lost control over the inflationary monster.
How is all this going to take a toll on the economy of these nations? On the one hand, companies have already been bearing the brunt of rising input costs. On the other hand, high interest rates pose a threat to their investments and expansion plans. So while high input costs will curb profitability, high interest rates will put a brake on growth.
We are not spelling doom for the BRIC economies. In fact, these economies are going to be driving the global economy in the coming times. However, the concerns that we have pointed out pose short to medium term risk that investors should bear in mind.