Infra investments develops Brazilian capital market

The investments in the Brazilian infrastructure sector might not only put the country’s economy on the growth path again, but also develop its capital market. Looking for ways to boost long-term private funding, the federal government has granted tax benefits to local and international investors for products linked to infrastructure projects. The receivables investment funds (known as FIDCs) are the new bet to increase the private funding in projects related to highways, railways, ports and airports.

To Ricardo Mizukawa, FIDCs committee coordinator at Brazilian Financial and Capital Markets Association (Anbima), the potential is huge due to the infrastructure investments needs in Brazil.

Brazil invested 2.2% of its GDP in infrastructure last year, and the government’s target is to reach 4% in the next three or four years, which means investments need to almost double in that period. 

Several recent changes have made this type of investment more appealing to foreign and local investors, and fund managers as well.

The Brazilian receivable investment funds are similar to other consumer loan securitization funds around the world. It is backed by trade receivables, credit cards, auto loans and other assets. FIDCs have often at least two classes of shares: senior and subordinated. The originator usually remains the subordinated class and it is responsible for taking on possible losses. The senior shares are offered to public investors.

Although FIDCs are not new in the Brazilian market, the legislator granted tax-exempt to receivable funds linked to infrastructure projects only at the end of 2012. According to Anbima, BRL 3.7bn (USD 1.5bn) are invested in infrastructure FIDCs of a total of BRL 213bn (USD 94bn) as a whole.

The assets that compromise the portfolios are generally acquired with a discount, which provides investors higher yields compared to other investments linked to interest rates. Besides that, as the portfolios usually contain receivables from a variety of debtors, the fund can be ranked higher than the company.

To have the tax benefit, the fund must be organized as a closed-end portfolio, and the originator or assignor of the receivables cannot be a financial institution. Before going to the market, the assets need approval from the government, and after the money is raised, it must be channeled into investment projects in infrastructure. The receivable investment funds must also pay fixed interest rates or be linked to a price index or even to a reference rate. Post-fixed interest rates are forbidden.

According to the legislation, if the sources are not allocated into the project, the receivable’s assignor will be fined 20% of the amount raised. The duration must be at least six years and the principal invested cannot be paid within the first two years from the close date of the offering.

A FIDC with multi assignors makes this product very attractive because it brings diversification to the portfolio and improves the portfolio’s rating.

Time to sift opportunities in Brazil’s infrastructure financial market

While the Brazilian government plans to attract private investors to its massive concession program in highways, railroads, ports, airports and high-speed rail (HSR), institutional investors have been looking for ways to invest in infrastructure. Although many of them prefer investing directly, there are some opportunities in the capital markets, either in bonds or even in the equities. Despite the recent volatility in the stock market, some brokers and analysts still believe long-term investors can find profitable investments in infrastructure companies listed in Brazil’s stock exchange (Bovespa), though it is necessary to sift them.

Bovespa index, highly concentrated in commodities companies, has been performing poorly this year — the benchmark has not closed a single month in the positive territory in this year. And the short-term international investors have been penalizing the market while the country’s economy continues to show signs of weakness. IPCA consumer price index rose 6.67% during the 12 months that ended in mid-June, above the government's inflation-targeting range of 2.5% to 6.5%. As a result, Brazil’s central bank was forced to raise its base interest rate for the first time in nearly two years. Infrastructure companies, however, have steady revenues as their contracts are adjusted annually by inflation, which makes their shares a good way of hedging.

The companies have a great level of future cash flows predictability, and the major risk is traffic volatility, though the Brazilian new car sales have been increasing. The traffic volume of light and heavy vehicles might remain strong and continue to grow above the country’s GDP in the next few years, several economists believe.

Despite the volatility in the stock market, there is no lack of appetite for infrastructure companies and investors have been showing lower pessimism in this sector.

CCR, EcoRodovias, Triunfo Participações and Arteris are the four companies listed in the Brazilian stock exchange, but the perspective to the companies varies. CCR, which is responsible for 2,437 kilometers of highways in the states of São Paulo, Rio de Janeiro and Paraná, is the preferred toll road stock among analysts.

UBS, for instance, is overweight in CCR’s shares, which are the top pick in the toll road sector. The company has R$ 7 billion (US$ 3.2 billion) to invest in new projects. The largest concession controlled by CCR is Autoban, considered one of the best roads in Brazil in terms of quality. 

CCR has been diversifying its business, investing not just in highways but in other ways of transportation, which is positive. In April, a consortium called VLT Carioca and formed by CCR, Invepar, Odebrecht, TransPort and RioPar Participações won the PPP contract to build a 28km-rail-transit (LRT) in Rio de Janeiro and operate it for 25 years.  

Political risk

Brazil’s regulatory environment for toll road operators has been transparent, but not fully independent of political interference. After weeks of protests focused on the high cost of transportation, Brazil’s largest state of São Paulo decided to freeze all highway toll fares until July 2014. The state suspended the toll increase of as much as 6.5 percent that was set to take effect on July 1 and froze fines for delays in construction and fees it charged from the companies to compensate the scrapped increases in fares.

The cancellation in the toll adjustment will be possible due to a reduction in the revenue charged by São Paulo State Transportation Concession Authority (Artesp), the state transportation regulatory agency, from 3% to 1.5%. The total cost for the government will be BRL 400m (USD 182m) in 2013. 

At first sight, it seemed the São Paulo state government was breaching contracts, but it is not, because there is a compensation for possible losses. 

Infrastructure is the major constraint on BRICs

Infrastructure bottleneck is still the major problem that jeopardizes the growth path in the BRIC’s (Brazil, Russia, India and China) economies. This is shown in a study by Grant Thornton’s International Business Report (IBR) with more than 12,500 businesses across 44 economies. According to the research, business leaders in the fast-growing BRIC economies believe the infrastructure is the major constraint on their ability to grow. Besides, the numbers reveal that for the first time, the top five most optimistic economies do not include the BRIC nations. The study does not place South Africa as part of the major emerging markets group.

To 45% of BRIC businesses, transport infrastructure is the major motive on their ability to grow, up from 21% last year. The data is also higher comparing to the global average of just 12%. The figure is particularly high in Russia (74%) and India (59%). In Brazil, 25% of the business leaders are dissatisfied with the quality of local transport infrastructure, a change from the 21% last year. It is important to note that the largest Latin America country will host the next FIFA World Cup, in 2014, and Summer Olympic Games, in 2016. In China, poor transportation was cited as a problem by 22% of the businesses.

Besides transportation, Information and Communication Technology (ITC) are considered a growth constraint. Addording to the research, 47% of the BRIC businesses cited ICT infrastructure as a bottleneck, a dramatic increase from the 19% figure recorded 12 months ago and the global average of just 14%. Again, India (64%) and Russia (63%) are the most concerned. ICT infrastructure is a bottleneck to be solved by 36% of the Brazilian business leaders, while it is 28% to the Chinese ones. 

To Ed Nusbaum, Global CEO of Grant Thornton, growth in the BRIC economies over the past decade has been incredible, with the four economies accounting for more than 30% of global economic growth since 2002. “However, the IBR results reveal that they are now facing capacity issues. Investment in infrastructure appears to have lagged behind growth, leaving unsatisfied business demand for better connectivity, says.

"The BRIC share of global economic growth is set to rise to 37% over the next five years, so these connectivity issues represent a major risk not just for the individual economies but the world as a whole."

When measured on a per capita basis, the GDP of the BRICs economies is behind that of the G7, but the major emerging markets are catching up fast. The BRICs forecast is to account for 37% of global growth in the period 2011-16, with China alone contributing 22%. This will increase the BRIC share of global production from 19% to 23%. Meanwhile, the proportion of global output produced by the traditional powerhouses in the G7 economies will fall from 48% to 44% over the same period.

The research also reveals that no BRIC economy makes it into the top five for business optimism for the first time in Q1-2013. Top of the list is Peru, followed by the Philippines, United Arab Emirates, Mexico and Chile.

In the Nusbaum’s opinion, investment in infrastructure is a sign that governments are serious about facilitating business growth. “This in turn breeds confidence (…) BRIC infrastructure concerns highlighted in the research are not temporary blips. They represent long-term problems which need to be addressed if growth is to be maintained in the coming years”, says. ““However, whilst the BRIC economies overcome their growing pains, the next wave of emerging markets – such as rapidly reforming Mexico and the other rising Latin American stars, Peru and Chile –  look ready to take up the mantle. There is no doubt that holes in output left by the BRICs offer opportunities for these frontier economies.”

The data was collected between January and February 2013. In total, 375 interviews were conducted with BRIC businesses.

China and Brazil Sign Currency Swap Agreement

China and Brazil have signed an agreement to trade their own currency to the equivalent of up to US$ 30 billion per year. The swap will take almost half of their trade exchanges out of the U.S. dollar zone. The deal confirms that the two countries are working together to lessen their dependence on the volatility of the American dollar and euro. The currency agreementl was announced before the start of the BRICS summit (Brazil, Russia, India, China and South Africa) in Durban, South Africa, today.

The trade between the two countries totalized around $75 billion in 2012. Brazilian officials have said they hope to have the trade and currency deal operating in the second half of 2013. According to the agreement, the respective currencies will be deposited in a special bank account without access to credit or remuneration.

According to Alexandre Tombini, the Brazilian Central Bank Governor, the idea is not to establish new relations with China, but rather expand relations in the case of turbulence in financial markets. “The swap won’t affect Brazil’s reserves because it’s in local currency,” he said, emphasizing it won’t affect current trade financing.

As the euro crisis continues on the spotlight and the West shows little signs of growth, the World Bank says the global economic growth is increasingly dependent on the BRICS countries. The five nations are responsible for 27% of global purchasing power and 45% of the world’s workforce.

BRICS development bank takes shape

The BRICS development bank is starting to take shape. Brazil, Russia, India, China and South Africa will each make an initial capital injection of $10 billion to fund the bank, which means the bank will start out with US$ 50 billion in capital. The idea is to establish a joint bank to provide funding for infrastructure projects and sustainable development in the five countries and even for other emerging markets and developing countries.

The development bank will lend to private and public companies in order to make sure more people will benefit from the bank’s capital. Governments outside the BRICS group can also be favored if they propose social or green projects (biofuel, for instance). Even nuclear power plants might receive money, a kind of project the World Bank does not fund due to social and environmental issues. Currently, 50 of the 66 nuclear reactors under construction are in the BRICS countries.

The new development bank wants to be an alternate lender to the World Bank and other finance bodies. The five nations have been struggling to change their role in the World Bank and in the International Monetary Fund (IMF). The BRICS countries have been important borrowers from the World Bank and they also have been increasing their contribution to IMF. The five nations want the IMF to reform its quota system to enhance their representation. The current voting policy in IMF does not reflect, for instance, the enormous changes in the global economy over the past few decades. The new development bank, therefore, might provide a bargaining power.

After a disappointing performance last year, the BRICS countries can make investors happy again in 2013. Last week, David Hauner, head of fixed-income strategy for emerging Europe, the Middle East and Africa in Bank of America Merrill Lynch, said investors should buy the BRICS bonds and equities this year. “What we’re saying about emerging markets is that the BRICs are back,” said in an interview in Abu Dhabi. “Last year a lot of people were saying that the BRICs are finished and of course we had disappointing growth in all of them. Now this year we see a recovery.”

According to Hauner, emerging markets are expected to record economic growth of 5.2% this year compared to 4.9% in 2012. The BRICS countries might be on the spotlight and, again, China might present the best growth rate. “Our own global asset allocation suggests that you should be overweight equities, overweight emerging market bonds, should be overweight high yield.”

Globally, however, the International Monetary Fund (IMF) continues to expect a modest economic growth of 3.5% in 2013. Within the BRICS countries, Brazil growth might disappoint again. The largest economy in Latin America might grow 3.5%, a better rate just comparing to South Africa (2.8%). China growth rate might reach 8.2%, followed by India (5.9%) and Russia (3.7%).

If emerging markets are currently not the global engine, who is?

After a year of disappointing economic growth rates in emerging markets, many economists are saying that these countries, especially the major ones—Brazil, Russia, India, China and South Africa (BRICS)—have faded as an engine of global recovery. According to some analysts, the emerging countries, except for China, have been struggling to grow and have been facing inflationary pressures. Although it is true to some point, this theory arouses as well an instigating question: if the emerging markets have faded as the global engine, who has been keeping with the global growth? Is it the U.S economy? Or  the eurozone? The answer is: the emerging markets.

The eurozone sovereign debt crisis seems to be under control, though this scenario can change anytime. The European group might have another year of low growth rates in 2013 associated with high unemployment figures, especially in Spain. And this is a problem that the policymakers do not solve rapidly. The Spanish government—as the Portuguese, Greek and Italian ones—will have to cut costs and social benefits, which means less money will be injected into the local economies. Thus, the eurozone might have another year of weak growth.

In the United States, the unemployment rates remain persistent and the U.S. debt problems are critical. “From my vantage point, the uncertainties surrounding the U.S. economy may just be the tip of the iceberg, threatening the global economy in the coming year,” wrote Mark Mobius, who directs the Templeton research team based in 15 global emerging markets offices and manages emerging markets portfolios.

Indeed, the problems over the US budget could restrain the economic growth around the world. According to the World Bank, “the US may fall into recession, posing a greater threat to the world economy than the euro zone crisis which is expected to continue in 2013,” said the institution on its n its Global Economic Prospects report.  The World Bank also said the US economy might grow 1.9% in 2013 due to "fiscal paralysis". The American Congress has to approve the US sovereign debt ceiling above the current USD 16.4-trillion mark.

On the other hand, the emerging markets have been growing at lower rates compared to some years ago, but in general they are still growing more than the developed markets. According to some analysts, the global emerging markets’ GDP might grow 5.1% in 2013 from 4.5% in 2012. China, for instance, might grow 8.1%, which means this will support growth for export-oriented companies in the emerging markets.

According to Mobius, Frankling Templeton’s research team is still generally positive on the long-term prospects for emerging and frontier market equities. “In our opinion, the economic background for many emerging and frontier markets is stronger than that prevailing in many developed markets,” Mobius wrote on his blog. “Although weak growth in developed markets could be transmitted to emerging markets, notably through declines in world trade, this influence could continue to be offset in emerging markets by higher investment spending and increased domestic demand.”

Another important point is that the emerging markets still have room for implementing fiscal and monetary policy. Yesterday, for instance, Brazil’s monetary authority decided to keep the annual basic interest rate in 7.25%—although this is the lowest level ever, the country has ample room to cut this interest rate

According to Mobius, the Chinese economy will have a stronger performance in 2013 compared to 2012. “The authorities will continue to reposition the Chinese economy to depend less on export and investment spending and more on domestic demand.

“We believe that the strong prospects for growth in many emerging markets are not currently recognized in equity valuations,” said the executive. To Mobius, two particular investment themes stand out to: consumers and commodities. “The consumer theme arises from consumers in many emerging markets becoming increasingly wealthy (…) the commodity theme reflects our expectation for strong growth in demand for hard and soft commodities as many emerging markets industrialize, likely grow wealthier and increase spending on infrastructure.”

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