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.