Ruble to Real Roiled as No Brick in BRICs $13.9 Billion Lost

Capital flight from the BRICs, Brazil, Russia, India and China, is sending their stocks, bonds and currencies down in tandem for the first time since 2006 as the 10-year love affair with the largest emerging markets ends.

“Every decade, there’s a theme that captures investors’ imagination -- the 1970s was about gold, 1980s was all about Japan and 1990s was about technology companies,” Ruchir Sharma, the New York-based head of emerging markets at Morgan Stanley Investment Management, which oversees $341 billion, said in a phone interview on July 8. “Last decade it was about the BRICs. That theme has basically run its course.”

Investors withdrew $13.9 billion from equity mutual funds invested in the four countries this year, or 27 percent of the inflows since 2005, according to EPFR Global. The MSCI BRIC Index fell 12 percent last quarter while the nations’ currencies sank 4.1 percent against the dollar and government bonds lost an average 0.6 percent, the only such correlation in data compiled by Bloomberg going back seven years.

Brazil’s combination of quickening inflation, weak economic growth and violent protests is driving away investors just as speculation of reduced Federal Reserve stimulus spurs capital outflows from emerging markets worldwide. Russia’s economy has slowed for five straight quarters as oil dropped, while India’s current-account deficit fueled the rupee’s decline to an all-time low. China is headed for the weakest annual expansion since 1990, according to Barclays Plc and HSBC Holdings Plc.

Goldman Advice

While the MSCI BRIC index has returned about 227 percent since Goldman Sachs Group Inc.’s 2003 prediction that the countries would join the ranks of the world’s biggest economies, the gauge is trailing the Standard & Poor’s 500 Index this year by the most since 1998, the year Russia defaulted on domestic debt. Goldman Sachs ended its seven-month recommendation to buy stocks linked to the BRIC nations on July 1 after they lagged behind companies with the most U.S. sales.

Russia’s Micex Index slid 0.9 percent today and India’s S&P BSE Sensex declined 0.8 percent. The Shanghai Composite Index rallied 2.2 percent, erasing early losses, amid speculation the government will take steps to support economic growth after exports unexpectedly fell in June. The yuan depreciated about 0.1 percent against the dollar.

Bearish Outlook

Brazil’s real weakened to a four-year low of 2.2768 per dollar on June 20 and dropped to 2.2645 today. The benchmark Ibovespa index has tumbled 28 percent from this year’s peak on Jan. 3 and foreign outflows from the stock market reached $1.8 billion last month, the second-biggest withdrawal since the exchange started tracking figures in 2010. Government bonds from Brazil sank 2.1 percent in local-currency terms in the past three months, the most since 2003, according to JPMorgan Chase & Co. indexes.

Russia’s stock-market capitalization fell to an almost four-year low of $631 billion on June 20, down from $1.2 trillion two years ago, and the ruble is trading within 2 percent of the weakest level in a year.

In India, foreigners sold a record $4.1 billion of government bonds the past three months, while outflows from the country’s stocks in June were the biggest since August 2011. China’s Shanghai Composite sank on June 27 to the lowest level since the depths of the global financial crisis in January 2009.

Smaller Markets

“People are very concerned about China and in Brazil, nothing seems to work anymore,” Maarten-Jan Bakkum, a senior emerging-markets strategist in The Hague at ING Investment Management, which oversees about $19 billion in emerging markets, said in a July 8 e-mail.

Smaller emerging markets have also retreated this year. Turkey’s Borsa ISE National 100 Index dropped 24 percent from its May 22 peak amid anti-government protests as the lira weakened to a record low. Benchmark equity gauges in the Philippines and Thailand declined more than 7 percent in June. Yields on Egyptian dollar bonds touched the highest since 2001 as the nation’s army ousted President Mohamed Mursi.

Between 2005 and 2012, investors poured $52 billion into funds investing in the four countries, according to data compiled Cambridge, Massachusetts-based research firm EPFR.

Jim O’Neill, the former Goldman Sachs economist who coined the term BRIC in 2001, two years before his colleagues predicted the countries would grab a greater share of the world economy, says the selloff has made equity valuations in Brazil, Russia and China “very attractive.”

Relative Value

The MSCI BRIC index’s 17 percent drop this year has dragged down the measure’s valuation to 1.2 times net assets, a 36 percent discount to the MSCI All-Country World Index. That’s the widest gap since Bloomberg began compiling the data in July 2009. The Ibovespa has a price-to-book ratio of 0.9, the cheapest since 2005 versus the global index. The 0.7 multiple on Russia’s Micex Index is the lowest among equity gauges in 21 developing nations.

While the BRIC economies are slowing, China is trying to ease the expansion on its own and produce “better quality and more lasting growth,” O’Neill, who retired as chairman of Goldman Sachs Asset Management in April and is now a Bloomberg View columnist, said in an e-mailed response to questions on July 8.

The BRICs “will remain the biggest economic changer and driver of this decade, even with softer growth,” O’Neill said. “Before the end of 2015, they will be collectively bigger than the U.S.”

IMF Forecasts

The combined gross domestic product of the BRIC nations rose to $14.5 trillion last year from $2.8 trillion in 2002, approaching the size of the U.S. economy at $15.7 trillion, according to International Monetary Fund data. The group accounted for 62 percent of global growth in 2012, up from 11 percent a decade earlier, IMF data show.

In a report published yesterday, the Washington-based lender cut its growth projection for the four BRIC nations this year, lowering its forecast for Russia by 0.9 percentage point to 2.5 percent, the slowest since the 2009 recession.

“After years of strong growth, the BRICs are beginning to run into speed bumps,” IMF Chief Economist Olivier Blanchard said a press conference in Washington. He urged BRIC policy makers to adopt measures to boost potential output.

The BRIC countries’ contribution to global economic growth is probably peaking, Dominic Wilson, the chief markets economist at New York-based Goldman Sachs who wrote the 2003 report on the BRICs, said in a June 19 note.

Slower Growth

Goldman Sachs equity strategists advised clients to exit a bet that U.S. companies with revenue from BRIC countries would outperform those reliant on domestic sales. The BRIC stocks returned 15.6 percent since November when the analysts initiated the trade, trailing the 17.5 percent gain in the U.S.-linked shares, according to the July 1 report.

“The problem is that it’s a structural slowdown rather than a cyclical slowdown,” Liza Ermolenko, an emerging-markets economist at Capital Economics in London, said by phone on July 8. “It’s more of a new phase rather than this being a temporary phenomenon.”

Banks from Barclays to HSBC predict China’s economy will grow 7.4 percent this year, the slowest expansion since 1990. Fitch Ratings Ltd. lowered China’s local-currency rating in April, saying its credit growth since 2008 has surpassed the levels before banking crises in Japan in the 1990s.

Brazilian Protests

The People’s Bank of China refrained from adding cash to the banking system last month in a move to slow lending, causing a surge in inter-bank borrowing costs and the worst cash crunch in more than a decade.

In Brazil, inflation jumped to 6.67 percent in the year through mid-June, breaching the government’s target ceiling of 6.5 percent. That has prompted policy makers to raise benchmark borrowing costs for the first time since 2011 even as growth sputters. Nomura Holding Inc. said on July 2 that Latin America’s largest economy may enter a recession by year-end.

A plan to raise bus fares in cities including Sao Paulo last month sparked the biggest street demonstrations in Brazil in two decades, leaving at least six dead and hundreds injured.

India’s current-account deficit widened to an all-time-high of 4.8 percent of GDP in the year through March, which is twice as much as Greece’s. That pushed the rupee down 8.5 percent this year.

IMF data show that Russia’s investment declined to 24 percent of GDP last year, from 38 percent a decade ago, compounding an economic slowdown as commodity prices dropped.

Declines in BRIC assets are set to deepen as the Fed’s withdrawal of stimulus cuts off cheap funding that helped boost economic growth and enabled government spending on popular social programs, according to Morgan Stanley’s Sharma, author of “Breakout Nations: In Pursuit of the Next Economic Miracles.”

“Many of these countries got very complacent after a very good decade and they were all riding the wave of the global liquidity,” said Sharma. “A lot of money flew to the emerging market based on the assumption that the U.S. is in a terminal decline and you have to go to these large emerging markets. Those expectations are being unwound.”

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