BRIC countries' equities and bond markets have outperformed in 2016 thanks to benign interest rate scenario, stabilization of oil prices and strong foreign fund inflows into these countries. Brazil's (+30% YtD) and Russia's (+29%) equity indexes performed much better than its peers [India (+3%) and China (+0.4%)] as a rebound in commodities' prices offered a relief to these export-oriented countries, also resulting in a sharp appreciation of their currencies - Russian ruble (~13%) and Brazilian real (~15%) against the dollar.
Oil prices will play a crucial role in the performance of the BRIC countries with any substantial increase being positive for Brazilian and Russian economy while any decrease being positive for Indian and Chinese economy. Oil prices movement will likely be limited to the upside as supply from US shale gas companies will increase if prices increase. It will also get a support on the downside due to production cut deal between OPEC and non-OPEC countries. In addition, the path of a rate hike in the US may determine the outflows from the EM countries. Thus, BRIC economy will face volatility from uncertain oil prices as well as US rate hikes in 2017. Bond markets of BRIC countries may underperform in light of US rate hikes but equities do offer a good opportunity especially, Brazil and India.
Brazil's economy has bottomed out and will likely report positive growth next year. According to the IMF estimates, Brazil is forecasted to report a GDP growth of 0.5% in 2017 vs. -3.3% in 2016. Political instability, falling commodities prices, high inflation and unemployment rate of >10% had been taking a toll on the economy until H12016. However, things have stabilized post the impeachment of former president Dilma Rousseff. The new president Mr. Temer has brought some stability to the country by implementing much-needed fiscal reforms like imposing a spending cap and reforming the most generous pension system. Monetarily, there may be few more rate cuts (Current Selic Rate: 13%) as inflation is easing (6.99 in November 2016 vs. 10.7 in December 2015) amid rising commodity prices. I remain positive on both the Brazilian equities and bond markets.
Russia's economy to rebound next year due to stabilization in crude oil prices- Decline in crude oil prices and economic sanctions imposed by the US and the Europe during 2014-2015 drove the Russian economy to recession in 2016. Capital outflows by the foreign institutions led to the Russian currency depreciating by more than 2.5x against the dollar this year. However, with a sharp rebound in oil prices since February 2016 and economic situation improving, USDRUB has recovered from a peak of 85.9 to ~60 now. Thus, Russia's financial markets offer opportunities as its economy will likely stabilize next year. However, monetary easing measures may be limited as the US interest rates outlook is on an increasing trend.
India's ongoing reforms are positive, and demonetization may cause short-term pain; good time to buy value stocks: India's PM Mr. Narendra Modi has been on a reform spree since last year and has implemented much needed reforms like the GST, recognition of NPAs and now demonetization. Defined Goods and Services Tax (GST) rate will boost the performance of the organized sector. Demonetization may hurt India's economic growth in the near term as Indian economy relies mostly on cash transactions. However, this move will curb money laundering activities and add to the real GDP over a course of time. But any sharp rise in crude oil prices may hinder the growth of companies which are dependent on oil imports and the fiscal deficit target may be breached too. The recent correction can be used as a buying opportunity to accumulate value stocks especially in the banking, pharmaceutical, IT and cement sectors. Although there are speculations of monetary and fiscal policy easing through rate and tax cuts, gradual increase of interest rates in the USA might limit aggressive policy support.
Chinese economy faces risks from mounting debts and gradual slowdown in demand; stay cautious: Chinese economy is facing dual risks from overcapacity and weak demand. In addition, China's mounting debt amid US interest rate hikes outlook may cause substantial capital outflows. Since 2000, China's debt in terms of debt to GDP ratio has grown to ~ 280-290%, even higher than the developed countries like US (269%) and Germany (258%), and emerging countries like Brazil (160%) and India (135%). These concerns have already led to relative underperformance in the equity and bond markets. The central bank has already said that its future decisions will be prudent thereby signaling limited or no rate cuts. The government also plans to take strict measure to prevent the bursting of real estate bubble. Thus, we stay cautious on both bond and equity markets and prefer only investment grade bonds and blue chip stocks to avoid any hard landing.
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