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.”