Emerging multimillionaires

The number of multimillionaires in the major emerging markets will boom 76% growth by 2016. According to a report elaborated by WealthInsight—a British consulting company which provides data about the wealth sector—, the BRICS countries (acronym for Brazil, Russia, India, China and South Africa) are quickly gaining people with at least $30 million in their bank accounts, and Beijing and Shanghai have, each one, more millionaires than Los Angeles.

The study is focused on the so-called ultra-high net worth individuals, which means people with $30 million or more. The study shows that Beijing has 1,318 high net worth individuals, while Shanghai has 1,028. On the other hand, Los Angeles has 950 people with at least $30 million. New York city, however, remains the place with the most ultra-high net worth individuals: 2,929.

While Beijing is the largest BRICS’ city for multimillionaires, São Paulo, in Brazil, occupies second place, with 1,310 high net worth individuals, which means that there are more multimillionaires in São Paulo than in San Francisco, Washington and Miami together. In the third place is Shanghai (see the table above).

According to the report, Moscow has 821 high net worth individuals, which means the Russian capital has even more multimillionaires than Chicago, while Mumbai (with 577 individuals) surpasses Dallas.

And the growth rate will continue to increase fast in the BRICS countries. According to WealthInsight, in India, the multimillionaire population will more than double by 2014, reaching 511,000. China is in the second place: the number of high net worth individuals might grow 82%, while in Brazil the number will increase by 40%.

The report covered 30 cities in total. On the list, China has 12 cities within the 30 largest, while Brazil has nine. India, by its turn, has five cities and Russia, two. South Africa has also two cities. According to the report, at the end of last year, there were 1.9 million high net worth individuals in the BRICS countries, with combined wealth of $7.5 trillion.

BRIC’s future shines in 2013

There is a light at the end of the tunnel for investors next year, and this light is particularly bright for emerging markets. According to a report elaborated by Schroders, a British multinational asset management which operates in 26 countries, the global growth is likely to continue to struggle in the next year given the headwind from fiscal policy in the advanced economies, but 2013 might be a stronger year than 2012 in the emerging world.

For Schroders analysts, the emerging markets—especially the four BRIC countries (acronym to Brazil, Russia, India and China)—will face stronger activity next year, although the economic growth will likely remain below potential. “We believe the recent rebound in activity in the emerging world, particularly China, has enough momentum to generate a bright start to 2013; but we remain cautious that much of this is down to the global inventory cycle, and that final demand remains weak,” says the report.

In terms of China’s economic growth, it might sum 7.7% in 2012, but investors should be aware of the Chinese activity since a significant part of the country’s recovery might be driven by a favorable stage of the global inventory cycle and the final demand, which remains weak.

“Additionally, it seems that the official growth target of the Chinese government has become a more reliable indicator of policy measures,” says the report. “In previous years, it was not unusual for the target to be exceeded by several percentage points, but it seems the new target of 7.5% per annum reflects a more realistic assessment of the Chinese economy, and this has implications for the likelihood of stimulus measures being enacted to maintain the target growth rate.” According to the Schroders’ forecast, China might grow 8% in 2013, below the 8.1% market-consensus.

Brazil has experienced a recovery in the macro data in the second half of the year. For the Schroders’ economists, the largest Latin America country might grow at least 1% quarter to quarter in both the third and fourth quarters. “Though we should see growth nudge down a tick as 2013 wears on, it should remain robust throughout the year,” says the report. The firm estimates that Brazil will grow 3.6% in 2013, much more than the 1.5% estimated for this year. “Looking ahead to 2014, we expect continued improvement to a shade over 4%. The FIFA World Cup, held across Brazil in June-July 2014, should also boost activity.”

Brazil has been using all kinds of monetary instruments to revive its economy, and the Brazilian Central Bank has been reducing rates sharply. Over the past year, the monetary authority cut the country’s interest rate by 500 basis points, more than any other group of the 20 nations. Today, the Brazilian benchmark interest rate is 7.5%, a historic low level.

“With so much easing having taken place, we expect the BCB to maintain the current policy rate at 7.25% for some time, unless outside shocks create significant deterioration in the macro outlook,” says the Schroders’ report. “It is likely, however, that the strengthening of activity and the depreciation of the Real earlier this year will put upward pressure on inflation throughout 2013.”

The economic activity in Russia, on its extent, has been facing a slowdown in the second half of the year. The recent signs, however, suggest that this slowing may have stabilized, and Schroders estimates that Russia’ Gross Domestic Product (GDP) will grow 3.5% in 2012. “Activity is unlikely to be helped by the Russian Central Bank (CBR), arguably the most hawkish in the world at this time, having raised rates in September just prior to inflation breaching its official target,” says the report.

India is the only one within the BRIC countries which can frustrate investors. According to Schroders, the activity in India will continue to be muted and disappointing. “Getting a strong grasp on the Indian economy can be challenging, as data is often poor and subject to very large revisions,” says the report. “It is clear, however, that the global slowdown has affected India, with growth so far this year slowing below 6% for the first time since 2008-9.”

India’s GDP might grow 5.6% in 2012. For Schroders, India will continue to face “an unpleasant cocktail of institutional, structural and cyclical headwinds to growth”, says the report. “One major barrier to an improvement in the cyclical outlook for India has been the persistence of high inflation, and the reluctance of the Reserve Bank of India (RBI) to ease policy as a result.”

An island of illusion

The United States fiscal cliff has been dominating the financial market’s attention around the world. Many investors have been questioning where to put their money while the scenario becomes clearer. Some economists say emerging markets might be an interesting investment strategy, especially the BRICS countries (acronym for Brazil, Russia, India, China and South Africa). But are the BRICS nations really a refuge for fiscal cliff?

First of all, it is important to understand what is the so-called fiscal cliff and its impact in the United States economy. The fiscal cliff is the combination of expiring tax cuts and government spending cuts. Without congressional action, up to $600 billion of expiring tax cuts, new taxes, and automatic spending cuts are set to take effect at the end of 2012 or beginning of 2013. This means that this combination is a threat to the American economy which can be back into a recession.

According to the American multinational financial services corporation Fidelity Investments’ forecasts, if the expiring tax cuts, new taxes, and automatic spending cuts hit all at once, the impact could amount to as much as 4%-5% of the United States Gross Domestic Product (GDP). As a result, “some experts anticipate the economy would experience a significant slowdown and there would be major consequences for financial markets,” says Fidelity.

In this context, some analysts believe emerging markets—especially the BRICS countries—might be a refuge to investors since these countries do not have a fiscal cliff and their balances of payments are in good shape. For Antoine W. Van Agtmael, Ashmore Emm founder and author of "The Emerging Markets Cenutry", it is time to think risks in a different way. 

In an interview with Bloomberg, he emphasized that the debt/GDP (rate) in emerging markets is better, as long as their consumer level and economic growth. Although the emerging markets have been facing an economic slowdown, most of them will continue to grow more than the developed countries. Van Agtmael aso said that he was optimistic about the United States, and that investors should keep their portfolio diversified.

The emerging markets are not immune to the United States fiscal cliff impacts. These nations do not constitute an isolated island. It is clear that, in a globalized world, it is an illusion to think that these major emerging markets might perform well in the worst scenario compared to the American economy. The perspectives of these countries might be better in relation to the developed countries, but the sky does have clouds.

Companies focus expansion plans on BRICs countries

Brazil, Russia, India, China are inspiring more investment confidence in terms of business. According to a research conducted by accountancy firm BDO, half of chief financial officers (CFOs) from medium-sized companies are now investing in or planning to enter these markets, compared to only three out of ten in 2011.

Over 1,000 CFOs from mid-sized companies across 14 markets were interviewed. The report only refers to Brazil, Russia, India and China as the BRIC countries, which means the accountancy firm puts South Africa apart from the group.

According to BDO, CFOs are still pursuing international expansion in order to drive revenue, but they are more cautious about where they choose to invest. The “big seven” countries—China, USA, Brazil, India, Germany, Russia and U.K.—lead as the most attractive investment markets, due to size and customer potential, says the report.

China remained the top investment destination, followed by the U.S. Some 69% of CFOs cited China’s market size as a key advantage and 37% were attracted to cheap labor in the country. Brazil has moved up to third position, from sixth in 2011.

“There is a boom in the BRICs—45% of mid-market CFOs are focusing their expansion plans on the BRICs, compared to 29% in 2011”, says the report. According to BDO, the BRIC countries can no longer be termed emerging markets. “They are now seen to be preferred—and known—investment entities”, states the survey.

More than two thirds of CFOs see customer service delivery crucial for international growth, with Brazilian, British and South African companies ranking this the most highly. In terms of revenue, Indian and Russian companies have seen the highest average overseas revenue increases, 18% and 17% respectively, while Brazilian CFOs have reported the lowest increase (5%).

The eurozone crisis, however, is playing an important role, with CFOs from Brazil and China saying that it has had a large impact on their international expansion plans.

Reflecting on the global impact of the eurozone crisis, CFOs from countries both within and outside Europe said their investments were affected: Brazil (58%), China, Germany and India (each 54%), and the Netherlands (50%). The countries least likely to report that the crisis had impacted their international expansion plans are Japan, Australia, South Africa and Canada: around two thirds of CFOs from these countries said the eurozone crisis had had little or no impact.

“Brazil’s increasing investment appeal is now reflected in its top three ranking for general international expansion—it is the third most attractive market in 2012, up from sixth place in 2011”, says the report. “The appeal of Brazil is fairly consistent across the board in terms of sectors, and highest amongst CFOs in France, Canada and USA.”

In China and India, the investments have additional attractions: higher growth rates are a key factor for about half the CFOs investing there, and the cheap labour rate attracts over a third of investors. High growth rates are also important when considering expansion to Brazil. For Russia, attractive profit margins are an important factor, mentioned by over a third of respondents (36%).

In Brazil, a quarter (24%) of CFOs in the professional services sectors are planning to increase their investment in Brazil, compared to 15% overall. Approximately three of ten Chinese and American CFOs are also expecting to increase their investments.

Three of the four BRIC countries are considered amongst the top twenty risky markets; Russia ranks ninth, China thirteenth, and India twentieth (Brazil narrowly escapes, ranking twenty second). This shows that, while BRIC countries are attractive markets for investments, they also come with some risks.

http://static.bdo.uk.com/assets/documents/2012/10/BDO_Ambition_Survey_2012_151012.pdf

Be optimistic on BRICS

The discussion about the economic slowdown on BRICS (acronym for Brazil, Russia, India, China and South Africa) and whether these markets will be able to overcome their own challenges is becoming repetitive. It is true that the emerging markets’ economies have been decreasing, but it is important to consider that most of these countries are growing more than the developed nations.

The financial crisis has hit all the economies around the world, especially the export-oriented ones such as BRICS. This scenario has been seen since the second half of 2011, and particularly in this year, when many emerging markets started to fight against the slowdown in their gross domestic product (GDP).

There are, however, many reasons to be optimistic about BRICS. Firstly, the five countries did their financial homework. Their economic fundamentals are now more solid compared a decade ago. Together, the BRICS’ countries have the world’s highest volume of reserves, which sums up to more than US$ 4 trillion.

Secondly, BRICS still have room to use macroeconomic tools to stimulate their economy. Brazil, for instance, has been reducing its interest rates sharply in order to fight against its economy slowdown. Over the past year, the Brazilian central bank cut the county’s interest rate by 525 basis points, more than any other group of the 20 nations. The Brazil’s benchmark Selic interest rate is 7.25%—a historic low level, but still high compared to other emerging and developed markets. Besides, these five countries have been using expansionary fiscal policy to stimulate their GDP.

Thirdly, commodities prices might remain high. As the emerging markets are still growing, these countries will support the demand for commodities. Oil and metals prices might continue volatile, but the forecasts for agricultural commodities are still good.

Another reason to be positive on BRICS is their powerful consumer market. Brazil, Russia, India, China and South Africa account for over 40% of the global population and about 25% of the global GDP. According to some economists, Brazil might just grow 1.5% this year, yet retail sales are projected to increase from 7% to 8%. China and India’s population is massive, which puts these countries ahead of the game.

Finally, the BRICS countries have been working to increase their cross-border investments or even to create an alternative lender (the BRICS development bank) to the World Bank and other finance bodies. The bank might initially start with US$ 50 billion in capital.

BRICS: a factory of millionaires

The US dollar appreciation, the euro depreciation and the real estate prices slowdown have affected the number of millionaires around the world. The good news is that the number of wealth individuals might experience an increase in the next years. A research conducted by Credit Suisse shows that the number of millionaires worldwide is expected to increase by about 18 million, reaching 46 million in 2017. The world wealth, in its turn, may totalize US$ 330 trillion by 2017.

The future is particularly promising to emerging markets, especially to the BRICS (acronym for Brazil, Russia, India, China and South Africa). According to Credit Suisse, only China might add a total of US$ 18 trillion to the stock of global wealth in the next five years and surpass Japan as the second-wealthiest country in the world. The USA should remain on top of the wealth league though, with US$ 89 trillion by 2017.

“Assuming moderate and stable economic growth, we expect total household wealth to rise by almost 50% in the next five years from US$ 223 trillion in 2012 to US$ 330 trillion in 2017”, says the report. The emerging markets, however, have been raising their share of world wealth. “Over the next five years, we expect to see a big improvement in the position of emerging economies (…) We expect that emerging economies will continue to catch up with developed economies, that the middle segment will increase in importance and that the number of millionaires will rise significantly.”

Brazil has been called the “awakening giant” by the report since the country is expected to have a higher level of advance in the number of millionaires in the next five years. According to the research, Brazil will gain 270,000 new millionaires in the period, from 227,000 millionaires to 497,000 in 2017, an increase by 119%. This percentage is the highest one within the BRICS countries. “Similar to a number of other Latin American countries, Brazil has more people in the US$ 10,000–100,000 range relative to the rest of the world, but fewer numbers in each of the other ranges”, says the report.

Russia might experience a sharp increase in the number of millionaires as well. The forecast is that the number of wealthy people will advance 109% from 97,000 in 2012 to 203,000 in 2017. According to Credit Suisse, excluding small Caribbean nations with resident billionaires, wealth inequality in Russia is the highest in the world. “Worldwide there is one billionaire for every US$ 194 billion in household wealth; Russia has one billionaire for every US$ 15 billion. Worldwide, billionaires collectively account for less than 2% of total household wealth; in Russia today, around 100 billionaires own 30% of all personal assets.”

In India, the number of millionaires might grow 53% in the same period, from 158,000 to 242,000 by the year 2017. The study says that wealth growth has been quite steady since 2000 in India, increasing at an average annual rate of 8%. “Together with most countries in the developing world, in India, personal wealth is heavily skewed towards property and other real assets, which make up 84% of estimated household assets.”

The predictions for China continue to be encouraging. According to the report, the number of Chinese millionaires might increase 97%, from 964,000 to 1,901,000 in the next five years. According to the research, China’s total household wealth is the third highest in the world, 25% behind Japan and 59% ahead of France (in fourth place). Due to a high savings rate and relatively well developed financial institutions, a high proportion (47%) of Chinese household assets are in financial form compared with other major developing or transition countries”, says the report.

The report refers to South Africa as one of the most successful African economies and an exciting emerging market. “Unusually for a developing country, household wealth is largely comprised of financial assets, which contribute 70% to the household portfolio. This reflects a vigorous stock market and sophisticated life insurance and pension industries, which are key aspects of the strong modern sector of the economy.”

The report considers “wealth” the value of financial assets plus real assets (principally housing) owned by households, less their debts, and private pension funds. The research was made from 2011 and 2012, and refers to mid-year (end-June) estimates.

BRICS development bank: a dream comes true?

One more step was taken by the BRICS countries (acronym for Brazil, Russia, India, China and South Africa) to create their own development bank. Authorities from the five nations were in Tokyo, and they reported that some progress toward the creation of the bank was done. According to the Brazilian business newspaper Valor Econômico, the bank might initially start with US$ 50 billion in capital.

The idea is to establish a joint bank which could provide funding for infrastructure projects and sustainable development in the five countries and even for other emerging markets and developing countries. At the same time, the BRICS development bank might be an alternate lender to the World Bank and other finance bodies, although some analysts are skeptical about it.

The BRICS countries have different objectives. While India sees the bank as an economic project, China has a political view of it. The five nations, however, can change their role in the World Bank and in the International Monetary Fund (IMF).

The BRICS countries are important borrowers from the World Bank. In 2011, over US$ 7 billion were approved to them. The five nations have been increasing their contribution to IMF, and they want the fund to reform its quota system to enhance their representation. They are demanding voting shares in IMF, for instance. Starting a new development bank might provide a bargaining power.

As the contributions to the development bank will probably be equal, the countries will have an equal voting structure. On the other hand, this can limit the size of the bank, since China has more reserves than the others. Together, the five countries have the world’s highest volume of reserves, which sums up to more than US$ 4 trillion. Today, Brazil, Russia, India, China and South Africa account for over 40% of the global population and about 25% of the global gross domestic product.

If it becomes a reality, the institution would be the first major multilateral lender to emerge since the European Bank for Reconstruction and Development in 1991. The BRICS will meet again in Mexico City next month.

Where is the ‘decoupling’?

Some years ago, when the BRICS countries (acronym for Brazil, Russia, India, China and South Africa) were growing very fast and the developed countries were struggling to accelerate their economies, many economists said that the “decoupling” thesis was evident and clear, with emerging and developed markets moving in opposite directions. China, analysts said, could be the new economic world’s driver and the country would beneficiate especially from its suppliers, which meant the others emerging markets.

It is clear that the “decoupling” thesis was premature and inappropriate, as an article by Financial Times showed today.  The global slowdown has hit the major emerging markets economies hard, although most of them will continue to grow more than the developed countries. China’s gross domestic product (GDP), for instance, might grow around 7% or 7.5% this year in contrast to the near 10% average annual growth seen in recent years.

Brazil is the most problematic case within BRICS. After growing 7.5% in 2010 and 2.7% in 2011, Latin America’s biggest country has been struggling to put its economy on track again. In the last months, Brazil has been using all kinds of monetary instruments to revive its economy. The Brazilian central bank has been reducing interest rates sharply in order to fight against its economy slowdown, but all these efforts have been creating another problem, inflation.

And there is more bad news. Today, the International Monetary Fund (IMF) reduced its world economic forecast. According to the IMF, the global growth might reach 3.3% in 2012 compared to 3.5% in its previous estimate. In 2013, the world might grow 3.6% compared to 3.9% in its last report in July. The IMF’s new estimates suggest a 15% chance of recession in the United States next year, 25% in Japan and above 80% in the Euro area. The forecasts are part of the fund’s World Economic Outlook report, released four times a year.

For Brazil, the IMF reduced its forecast from 2.5% in its last estimate to 1.5% this year. The Brazilian economy has the lowest growth forecast compared to its peers in the BRICS group.  

The IMF’s downgrade for India has been the most aggressive within the major economies. The fund expected India’s economy to advance 4.9% in 2012, 1.3 percentage points less from the July forecast. India has had the worst mid-year recast by the IMF for any major economy.

For Russia, the International Monetary Fund (IMF) reduced its forecast in 2012 from 4% to 3.7%. The institution has also revised its estimates for Russia's growth in 2013 from 3.9% to 3.8%. The last time India’s growth rate fell below 5% was during the global financial crisis in 2008.

According to IMF forecasts, South Africa might grow 5% this year, while in July the projection was 5.4%. China, on the other hand, will face a “soft land” and grow 7.8% this year and 8.2% next year. In July, the IMF had forecasted growth of 8% in 2012 and expansion of 8.5% for 2013.

Today, Brazil, Russia, India, China and South Africa account for over 40% of the global population and about 25% of the global gross domestic product. Together, the five countries have the world's highest volume of reserves, which sums up to more than US$ 4 trillion.

As the Financial Times article says, it is clear that “the declarations of ‘decoupling’ from the west were premature”. The article reminds us that European Union remains collectively the largest economy in the world, and that a recession there and a slow growth in the United States inevitably affect the BRICS nations. In a globalized world, every problem echoes from one country to the others, sooner or later.

http://www.imf.org/external/pubs/ft/weo/2012/02/index.htm

http://www.ft.com/intl/cms/s/0/af6e8b08-1136-11e2-8d5f-00144feabdc0.html#axzz28pLvZKq8

“BRIC nations aren’t hitting a growth brick wall”, says Mobius

After fast growth in the last few years, the BRIC countries (Brazil, Russia, India and China) are facing a maturation time. The global slowdown has hit the major emerging markets economies hard, but the BRIC nations have not hit a brick wall in terms of growth, says Mark Mobius, the executive chairman of Templeton Emerging Markets Group who directs the Templeton research team based in 15 global emerging markets offices and manages emerging markets portfolios.

According to Mobius, although the growth forecast for the BRIC countries has disappointed investors, some deceleration in China’s growth rate was almost inevitable. On the other hand, Brazil is the one nation within the group which gives investors most cause for concern. “(Brazil’s) GDP growth in recent years has been below that of India and China, and a populist and interventionist tradition in government has left the country with unusually high taxes, a relatively high minimum wage compared to its peers, and potentially troublesome pension and benefit entitlements for public sector workers”, says the executive.

Another problem in Brazil is the nationalist policies in some key industries, especially energy, which tended to slow and complicate some investment programs. “The government has been moving to address some of its challenges, notably with measures to curb pension costs for state employees, and there are signs of a renewed appetite for privatization. Meanwhile, we believe domestic consumption could advance, supported by a young and dynamic working population, powering a gradual diversification of the economy”, says Mobius

Brazil, from the four emerging markets, may also be more vulnerable to fluctuations in the prices and demand for commodities. “However, in our opinion, we don’t see short-term commodity pullbacks leading to long-term weakness, as growth in several other emerging economies appears likely to continue to support demand”, says the executive.

In China, some deceleration in the growth rate was already expected, given the size of the country’s workforce. “In this context, forecasts of around 7% annual growth this year (as opposed to the near 10% average annual gains seen in recent years) seem entirely rational to us”, says Mobius. The executive chairman of Templeton Emerging Markets Group reminds that China’s last Government Work Report, the Chinese Premier Wen Jiabao projected a 7.5% growth rate for 2012. To Mobius, however, this forecast might prove to be conservative.

In contrast to China, India’s troubled government has been struggling to implement necessary investment and infrastructure projects. A number of populist and anti-business initiatives has also eroded investor confidence in recent months. “There was also concern that measures to support consumption were crowding out private sector investment and leading to balance-of-payments deficits”, says Mobius.

According to Mobius, while more reforms could be made, the actions of the Indian government and its central bank represent positive steps to restore the investors’ confidence. Moreover, the government measures can potentially set the stage for better growth going forward. “Despite its obstacles, India’s economy has proved adept at generating growth in recent years without heavy investment and with a much better ratio of growth to capital spending than China.”

In Russia, the recent gross domestic product (GDP) numbers shows the economic growth remains strong. “A heavy dependence on the oil and gas industry could represent a risk factor, as oil accounts for the bulk of Russia’s exports and a considerable portion of federal budget revenues”, says Mobius. “However, we feel that an oil price crash is unlikely, at least in the near or medium-term. In addition, the government recently announced ambitious economic reforms aimed at addressing the country’s dependence on commodity exports”.

According to Mobius, the BRIC nations aren’t hitting a growth brick wall, but if emerging markets in general continue to achieve strong economic growth in the coming years, the BRIC countries will have to scale a few obstacles.

China offers the best opportunities

China’s economic growth has not increased as much as it did in the last few years, but the country still offers the best opportunities to investors. This is the opinion of Jim O’Neill, chairman of Goldman Sachs Asset Management who coined the acronym BRIC ten years ago. China’s gross domestic product (GDP) might grow around 7% or 7.5% this year in contrast of the near 10% average annual growth seen in recent years.

According to an article published by Forbes, O’Neill believes the size of the Chinese economy put the country in a unique position to deal with the economy slowdown after the European debt crisis. The chairman of Goldman Sachs had showed his preference for China to a group of investors in Singapore this weekend.

China’s government is trying to move the country away from an export driven economy to one that focuses more on domestic consumption.

http://mobius.blog.franklintempleton.com/2012/09/26/brics-economic-growth/?nicamp=other&nichn=markmobius&nismseg=twitter_brics

http://www.forbes.com/sites/kenrapoza/2012/09/29/goldman-sachs-jim-oneill-china-best-bric/

Brazil: from swan to ugly duckling

It has been difficult for Brazil to change from an ugly duckling into a beautiful swan, economically speaking. The country might grow less than all the others major emerging markets which compose the BRICS’ economies (acronym for Brazil, Russia, India, China and South Africa).

The Brazilian central bank, in its quarterly inflation report today, announced a reduction in its growth forecast for 2012 while the bank increased its estimates to inflation. According to the bank, the forecast for inflation rose to 5.2% this year, from 4.7% in the June report. On the other hand, its forecast for Latin America’s biggest economy this year decreased to 1.6%, from 2.5% in June.

This means that the forecast for the Brazilian economy this year is lower than the 2.15% expected in the U.S. and 2.5% in Japan. After growing 7.5% in 2010 and 2.7% in 2011, the global slowdown has hit Latin America’s biggest economy hard and Brazil has been struggling to put its economy on track again. The country has the lowest growth estimate compared to its peers in the BRICS group.

Brazil’s central bank believes, however, the economy will heat up in the next months and the gross domestic product (GDP) should grow 3.3% in the second quarter of 2013.

In the last months, Brazil has been using all kinds of monetary instruments to revive its economy. Brazil’s central bank has been reducing interest rates sharply in order to fight against its economy slowdown. Over the past year, for instance, the government cut the country’s interest rate by 500 basis points, more than any other group of 20 nations. The Brazilian benchmark Selic interest rate is 7.5%, a historic low level.

The efforts to revive the economy, nevertheless, have been creating another problem: inflation. According to the Brazilian central bank, the efforts to revive growth through tax breaks and spending increases are contributing to inflation which reduces the room for additional monetary stimulus.

The central bank said the fiscal policy is moving from a “neutral to slightly expansionary position” and any future rate cut must be carried out with “maximum parsimony”. As a result, traders immediately reinforced bets that the Brazilian policymaker will not cut interest rates at their next meeting in October.

Brazil has to pay huge attention to prices’ stability since the country had a painful period of hyperinflation. In 1990, for instance, Brazil’s inflation rate was about 3000%. It is unquestionable that measures have to be taken by Latin America's biggest economy to revive its growth, but the price stability can't be jeopardized. 

BRICS millionaires lose ground

The slowdown in economy has impacted the number of millionaires in emerging markets, especially in BRICS (acronym for Brazil, Russia, India, China and South Africa).  According to a report elaborated by Wealth-X, the number of ultra high net worth individuals (UHNWI)—with a net worth of US$ 30 million or more—diminished 3.5% this year comparing to the same period last year.

In 2011, the number of ultra high net worth individuals in the BRICS countries was 26,465 while their richness was evaluated by US$ 4,410 billion. In 2012, the number dropped down to 25,545, and the total amount was US$ 4,075 (-7.6%). The report considers a high net worth individual who has more than US$ 30 million after accounting for shares in public companies, residential and investment properties, art collection, planes, cash and other assets.

The intensification of the Eurozone crisis has especially impacted Russia within BRICS. The total wealth in Russia suffered a drop of 14.8% while the number of high net worth individuals fell 11.3%

In China, the situation was not different: the total wealth decreased 6.8% while the number of millionaires shrank 2.3%. According to Wealth-X, the number of millionaires in China was impacted by three factors: the weaker Chinese GDP; the slowdown in property market; and the stock market, which has been performing poorly this year. The crisis has especially hit export-oriented economies, where the reduction in demand has impacted growth, says Wealth-X.

A similar trend has seen in Brazil, where the number of millionaires reduced 1.8%, while the total wealth dropped 6.5%. Europe’s sovereign debt crisis has eroded demand for exports from emerging economies, reducing the demand for commodities, which affected particularly Brazil’s economy. “As the impact reverberates along the global supply chain, commodity prices are likely to be constrained, contributing to slowing economic growth in Brazil for 2012”, says the report. During the measuring period, Brazil’s “GDP saw modest growth, however that was offset by the 10% decline in equity markets and the 31% devaluation in the Brazilian Real.”

In India, the total wealth amount suffered a drop of 5,7%. According to Wealth-X, the Indian equity markets—which declined by 8% during the measuring period—caused a significant impact on the local UHNW population while the Indian Rupee fell 25%.

South Africa was the only country within BRICS that has experienced growth in number of millionaires from 2011 to 2012: the number of UHNW individuals increased 8.3%. “Wealth-X projects that South Africa’s UHNW population will expand an average of 6.2% over the next five years driven by a surge in property and equity markets. Total wealth is expected to grow 12.4% in the same period”, says the report.

Globally speaking, the ultra high net worth population stands at 187,380 with a wealth of US$ 25.8 trillion. The combined wealth attributable to this segment shrank 1.8% from a year ago. According to Wealth-X, there are 2,160 billionaires globally. This group of billionaires, representing the top 1.2% of the world’s UHNW population, controls 24% of the total fortune attributable to the ultra wealthy. On average, these billionaires are worth US$2.9 billion each.

The United States leads in terms of real growth in UHNW population numbers, with 2,250 UHNWIs joining the ranks of the ultra wealthy. The combined total wealth of the American high net worth population has expanded by US$ 265 billion, despite the weakness in global markets and the tepid recovery within the U.S.

Canada is expected to see moderate growth in terms of millionaires, going from 2.5% in 2011 to 2.1% this year.

http://wealthx.com/wealthreport/Wealth-X-world-ultra-wealth-report.pdf

Will QE3 benefit the BRICS countries?

Today, the US central bank (Federal Reserve) announced a third round of the program called quantitative easing (QE3), which means the government will expand its holdings of long-term securities with open-ended purchases of US$ 40 billion of mortgage debt a month. The program is another attempt to boost the economy and reduce unemployment. The Federal Open Market Committee (FOMC)—a committee composed by twelve members where five of them Federal Reserve Bank presidents—also said the federal funds rate might be kept near zero through at least the middle of 2015.

Will the third round of the quantitative easing benefit emerging markets, particularly BRICS (acronym to Brazil, Russia, India, China and South Africa). This question has two possible answers, and both are correct: yes and no.

At the first moment, the QE3 program benefits emerging markets. As the American central bank will buy debts from commercial banks and other private institutions, it is inject money into the economy since banks will have more money to lend to companies. Entrepreneurs, in their turn, might invest to increase productivity reducing the unemployment rate. With more money circulating into the economy, part of them may have the emerging markets as a destiny, especially the largest ones.

Another benefit came from commodities. As the amount of money circulating into the economy will increase, investors tend to become more worried about inflation pressures. Then, they look for commodities, particularly precious metals such as gold, silver and cooper, to reduce their invest risks, and emerging markets are huge producers of such materials.

Commodities prices might rise also because the QE3 program is designed to benefit sectors like construction, housing and consumer staples. Approximately 98% of iron ore, for instance, is used to make steel and this material is used in construction. The major producer of iron ore is Brazil, China, Russia, India and Australia.

However, not everything in this history is a bed of roses. As the United States has been increasing the economy’s liquidity, one of the consequences is currency pressures, weakening the US dollar and strengthening the other currencies. So, emerging markets governments and central banks leaders can have to interfere in the market if their currency strengthens too rapidly due to surge in capital inflows.

As BRICS, especially Brazil, have been struggling to revive their economy, the QE3 program can bring more benefits than problems to the major emerging markets.

China: new stimulus bets

Place your bets. Will China announce new economic stimulus to boost economic growth? Will the world's largest economy and the biggest market between BRICS (acronym to Brazil, Russia, India, China and South Africa) be able to drive a recovery across the globe? What can be said for sure right now is the expectations for new stimulus to boost economic growth in China have been increasing around the world. 

The speculation has risen after the Chinese government announced last week infrastructure plans to build highways, waterways, urban rail and waste water treatment plans estimated in 1 trillion yuans (approximately US$156 billion). The Chinese government did not describe the investments as a stimulus package, but analysts say the measure signals a shift in policy.

Hope for new stimulus measures to boost Chinese economy has increased even more after the industrial figures released yesterday. China’s industrial production grew 8.9% year-on-year in August—the lowest result since May 2009, when the world was in the depths of the global economic crisis. Imports unexpectedly fell 2.6% in July as well, with softened domestic demand.

On Saturday, President Hu Jintao said the “underlying impact of the financial crisis is far from over”. To some analysts, this was another signal that the Chinese government is worried about the economic slowdown and has become open to resorting new stimulus measures. China's gross domestic product (GDP) expanded 7.6 percent in the second quarter of 2012 the worst performance in three years and the sixth straight quarter of easing.

After the infrastructure investment plan, it seems that Chinese policymakers might consider implementing more fiscal measures to support economic growth. Speculation is that the Chinese government will likely act soon, possibly even cutting interest rates.

The Chinese government has taken steps this year to stimulate growth by cutting interest rates twice in quick succession. The government also slashed the amount of funds banks must keep in reserve as ways to increase lending. In 2008, China carried out a huge 4.0 trillion yuan fiscal stimulus package to fight against the global financial crisis. 

Brazil GDP: nothing to celebrate

Brazil has reasons to worry about its economy. Last week, the Brazilian national statistics office reported the second-quarter gross domestic product (GDP), which expanded 0.5% compared to the previous year. The result shows the country had the worst second-quarter GDP growth between BRICS (acronym for Brazil, Russia, India, China and South Africa). 

While Brazil’s gross domestic product expanded 0.5 percent, China grew 7.6% at the same time. India, in its turn, expanded 5.5%, Russia’ GDP increased 4.0% and South Africa, 3.2%. This was the fourth quarter in a row that Brazil’s growth is lower than the other major emerging markets.  

Even the United States, which the economic crisis is still echoing, expanded more than Brazil. The American GDP grew 2.3% in the second quarter from the previous year.

It means that Brazil has a hard work to do to put its economy on growth track again. The good news, however, is that comparing to the previous three months, Brazil grew 0.4%, the fastest pace in a year. According to economists, this is a little evidence of recovery, but the recent measures to spur consumption might not be enough to ensure Brazil’s economy growth this year will exceed the United States one.

Brazilian central bank survey says GDP will grow just 1.64% in 2012. So, the forecast for the Latin America’s biggest economy this year is lower than the 2.15 percent expected in the U.S. and 2.5 percent in Japan. And given all Brazil’s infrastructure bottlenecks and structural problems, the government’s biggest headache might be soon not its growth but the fight against inflation.

Brazil struggles to revive growth

More than any country, Brazil is using all instruments tools to stimulate economic growth. Yesterday, more steps were given in order to revive the country’ economy: Brazil’ central bank reduced its benchmark Selic interest rate by 50 basis points to 7.5%, a historic low. At the same time, the central bank signaled another cut might happen in October.

Brazil’s central bank is the first of its peers in the major economies to start to reduce interest rates sharply in order to fight against its economy slowdown caused by a previous rate tightening cycle and the eurozone crises. Just to have an idea, over the past year, the government has lowered borrowing costs nine times to revive economic growth. The central bank cut the country’s interest rate by 500 basis points, more than any other group of 20 nations.

The global slowdown has hit Latin America’s biggest economy hard. After growing 7.5% in 2010 and 2.7% in 2011, Brazil’s GDP might grow just 2.5% this year according to International Monetary Fund (IMF) growth forecasts. The country has the lowest growth estimate compared to its peers in the BRICS group—the major emerging markets composed by Brazil, Russia, India, China and South Africa.

This week, the Brazilian government had already announced more economic incentives: a two-month extension of tax breaks for new cars. The measure would expire this month. The finance minister Guido Mantega also extended to the end of the year tax relief on white goods such as washing machines, refrigerators, stoves and dishwashers. The Brazil’s development bank (BNDES) also announced new credit lines for capital equipment.

The last figures about Brazil’s economy show that the country has been recovering: retails sales increased while unemployment figures diminished. Retail sales grew 1.5% in June and vehicle sales surged to 364,196 units in July, the most since December 2010. At the same time, the central bank indicator for gross domestic product increased 0.75% in June compared to May, which suggests stimulus efforts are beginning to flourish.

Brazil’s economy is starting to show the first signs of recovery, but it is still fragile. While the government is using all its instruments to put growth on track, the inflation outlook is deteriorating. The central bank has been reiterating that inflation will slowdown and it will converge to 4.5% target by the end of the year, but the convergence will not be linear. However, economists have been increasing their forecasts’ inflation to 5.5% until the end of the year.

Brazil’s economic recovery can be beneficiated by the expected stimulus measures from the US Federal Reserve, which will likely help speed up growth in the biggest economy in Latin America. It’s time to wait and see…

Corruption risks in BRICS

Although the BRICS (Brazil, Russia, India, China and South Africa) countries’ economy has developed a lot in the last few years, corruption is still a huge problem and a recurring practice in these nations. So, international companies which operate in these countries face the potential of corrupt practices in their overseas operations, and corruption risk might compromise business. The risk of facing extortion happens particularly in the public sector, where there is more political inference and excess levels of bureaucracy.

According to consulting group Maplecroft, in case of Brazil, corruption affects all areas of civil, public and corporate life. “Although President Dilma Rousseff has indicated a willingness to take a strong line against corruption, there are constraints in the shape of unwieldy bureaucratic processes and poor prosecution rates, as well as opposition within the political sphere”, says a study by the institution.

Companies face corruption risk especially in areas related to public contracts, given the need for close interaction with potentially corrupt government officials. “The construction industry is noted as a particularly high risk sector (in Brazil)”, says Maplecroft. “Risks in this area could be heightened amid major contracting being conducted ahead of the 2014 World Cup and 2016 Olympics.”

The situation in not different in Russia, and corruption is one of the most significant barriers for business operations in the country. “The business activities at greatest risk from corruption are those requiring engagement with public officials, such as public procurement and the payment of tax or customs duties, where bureaucratic inefficiencies may encourage facilitation payments to expedite official functions”, says the study.

The oil and gas sectors and the pharmaceutical sectors are noted as examples of high risk sectors in Russia. “Despite regulation and policy clearly setting out anti-corruption targets in Russia, implementation of the law is weak”, says Maplecroft. Yet the study recognizes there has been continued articulation of the intention to pursue an anti-corruption agenda. “However, the anticipated return of Prime Minister Vladimir Putin to the Presidency in 2012 signals potentially two more terms of political stagnation and continuing corruption.”

In India, companies might face a complex and inconsistently enforced anti-corruption framework. According to Maplecroft, there are numerous laws criminalizing corruption in its many forms, but the weak capacity of the country’s anti-corruption agencies undermines enforcement. “Recent corruption scandals have highlighted weaknesses in the country’s legal framework, driving demands for legislative changes”, says the consulting group. “In response to the recent scandals, scrutiny of business deals is likely to increase. Construction, extractives, public utilities, finance and healthcare are noted to be among the highest risk sectors.”

To Maplecroft, although the Indian government of Manmohan Singh has vowed to tackle corruption, the seriousness of its efforts has been brought into question by a series of corruption scandals which have surfaced over the past two years.

In China, corruption remains prevalent and a key risk to investors as well. “The risk to business is greatest when engaged with public officials at the regional and local level, where transparency and supervision is most lacking”, says the study. “Despite regulations providing for transparent and equal tendering, corruption is rife in public procurement and contracting.”

According to Maplecroft, facilitation payments are also commonly expected by officials to carry out administrative services for businesses, including in the payment of taxes and customs duty. “Construction, natural resource extraction, finance and healthcare are highlighted as high risk sectors.”

To Maplecroft, the Chinese government has acknowledged that widespread corruption risks compromising China’s goal of economic development, and the prevalence of corruption can undermine government institutions, increase inequality, fuel social unrest and distort the economy. “This realization has dictated recent efforts by the Chinese Communist Party to improve integrity in governance and business”, says the study.

The study does not mention corruption problems in South Africa.

http://maplecroft.com/about/news/corruption-risk-briefings-february21.html

Brazil fights against infrastructure bottleneck

How to stimulate economy and put growth on the track again is something that has been making many countries to lose their sleep, and this is not different to the BRICS countries (Brazil, Russia, India, China and South Africa). Although these nations GDP are still growing while many countries face stagnation, BRICS is implementing measures to stimulate their economies. Brazil, for instance, decided to fight against one of the biggest obstacles to faster growth: its infrastructure bottlenecks.

Last week, the Brazilian president Dilma Rosseuff announced several measures focused on concessions for improvements transport infrastructure. The stimulus package will provide R$ 133 billion (US$ 65.5 billion) to spur investments in road and rail infrastructure.

The plan is to sell concessions in nine highways and 12 railways. So, the government will sell rights for private companies to operate 7,500km of roads and 10,000km of railways. The measures will double the capacity of the country’s main highways. Finance will be provided by Brazil’s state development bank called BNDES, the main source of corporate credit in the country. The bank will provide subsidized loans for the projects.

The idea is to expand Brazil’s overloaded transport system. According to Rosseuff, this is the first step to modernize Brazilian transport infrastructure and the government will launch other stimulus packages to improve airports, ports and waterways as well. Then, similar concessions for airports and seaports are expected in the coming weeks.

This is one of a series of measures the Brazilian government is taking to increase investors’ confidence in the world’s second-largest emerging market economy, and the stimulus package might also pave the way for higher growth rates. The global slowdown has hit Latin America’s biggest economy hard. After growing 7.5% in 2010 and 2.7% in 2011, Brazil’s GDP might grow just 2.5% this year according to International Monetary Fund (IMF) growth forecasts.

The stimulus measures are an effort to modernize Brazilian economy. Brazil is a continent-sized country which is struggling to upgrade transport infrastructure before it hosts the 2014 soccer World Cup and 2016 Summer Olympics, and the country has obvious infrastructure bottlenecks. It is also a necessary chance in Brazil’s policy, which has favored consumption over investments in the last years.

Just to have an idea, the country’s existing infrastructure is so deficient that many of its big mining, steel and commodities companies operate their own private rails, roads and even ports. So, the package can reduce business cost and make the economy more efficient and competitive. Today, goods take at least twice as long to move the same distance as they do in China, for example.

However, the big question is if the government will be able to implement the stimulus package in an effective way. Brazil has a huge bureaucracy, legal issues and costs that quickly get out of control.

Another thing is corruption, which is a big problem in Brazil. But Rousseff has been trying to fight against corruption since the beginning of her government.  Then, the real question is how long the measures are going to take before the strategies get out of the paper.

BRICS: a US$ 30 trillion-decathlon

Where are the most prominent business markets around the world? They are in emerging markets, especially in the BRICS countries (group composed by Brazil, Russia, India, China and South Africa). According to study by McKinsey Global Institute (MGI) called “Winning the US$30 trillion decathlon: Going for gold in emerging markets”, by 2025, annual consumption in emerging markets will reach US$30 trillion—the biggest growth opportunity in the history of capitalism.

In a series of surveys, MGI interviewed more than 300 executives at 17 of the world’s leading multinationals. The professionals were chosen from a range of sectors and geographies. The research was conducted by Yuval Atsmon, Peter Child, Richard Dobbs, and Laxman Narasimhan.

According to the study, CEOs at most large multinational firms say they are well aware that emerging markets hold the key to long-term success, but they also recognize the complexity of seizing this opportunity as well.

The importance of emerging markets inside multinational companies has been increasing exponentially. In 2010, for example, 100 of the world’s largest companies headquartered in developed economies derived just 17% of their total revenue from emerging markets. “(…) those markets accounted for 36% of global GDP and are likely to contribute more than 70% of global GDP growth between now and 2025”, says the report.

However, the authors put on a spotlight on the challenges in order to reach success in emerging markets, and compared the efforts to a decathlon—sport that combine ten track and field events. “Our experience suggests the challenge in emerging markets more closely resembles a decathlon, where success comes from all-around excellence across multiple sports”, says. “As with a decathlon, there’s no single path to victory.”

Over the past two decades, the urbanization of emerging markets—supported by the removal of trade barriers and the spread of market-oriented economic policies—has powered growth in emerging economies and more than doubled the ranks of the consuming class, to 2.4 billion people. By 2025, MGI research suggests that number will nearly double again, to 4.2 billion consumers out of a global population of 7.9 billion people.

According to MGI’s estimates, by 2025, annual consumption in emerging markets will rise to US$30 trillion, up from US$12 trillion in 2010, and account for nearly 50% of the world’s total, up from 32% in 2010. “As a result, emerging-market consumers will become the dominant force in the global economy.”

In many product categories, such as white goods and electronics, emerging-market consumers will represent the majority of the global demand. “Even under the most pessimistic scenarios for global growth, emerging markets are likely to outperform developed economies significantly for decades”, says the report.

So, the business opportunities in emerging markets are vast. More than half of all global Internet users are in emerging markets. Over the next 15 years, just 440 emerging-market cities will generate nearly half of global GDP growth and 40% of global consumption growth.

In Brazil, for instance, social-network penetration was the second highest in the world in 2010. And a recent McKinsey survey of urban African consumers in 15 cities in ten different countries found that almost 60% owned Internet-capable phones or smartphones.

Besides, the scale of the modern exodus from farms to cities has no precedent. In emerging-market economies today, the population of cities grows by 65 million people a year—the equivalent of seven cities the size of Chicago, says the study.

Nevertheless, for developed-market companies, winning consumers in these new high-growth markets requires a radical change in mind-set, capabilities, and allocation of resources, says the study.

In Brazil, the big metro market is São Paulo state, with a GDP larger than Argentina’s. “But competition in São Paulo is brutal and retail margins razor thin”, says the research. “For new entrants to the Brazilian market, there might be better options in the northeast, Brazil’s populous but historically poorest region.”

The diversity of consumer preferences is another challenge for multinational companies.

China, for example, has 56 different ethnic groups, who speak 292 distinct languages. In case of India, the country embraces about 20 official languages, hundreds of dialects, and four major religious traditions. Brazil is one of the world’s most ethnically and culturally diverse countries in the world. And the residents of Africa’s 53 countries speak an estimated 2,000 different languages and dialects.

To win in emerging markets, developed-market companies must be willing to embrace big changes fast. “Those unable to reallocate resources radically risk a drubbing by local competitors”, says the study. According to research, emerging-market companies redeploy investment across business units at much higher rates than companies domiciled in developed markets, and they are growing faster than their developed-market counterparts.

It’s important to point that unskilled workers might be another challenge to companies which are interested in penetrating emerging societies. Skilled managers are scarce and hard to retain. “Yet there’s no escaping the importance in emerging markets of making big bets and riding them for the long term”, says the study. “The investment profile of global consumer products giants that have established a successful presence in emerging markets indicates an interval of approximately four or five years until investments pay off. M&A can accelerate progress.” 

https://www.mckinseyquarterly.com/Winning_the_30_trillion_decathlon_Going_for_gold_in_emerging_markets_3002