The Brics start to look wobbly as emerging market growth slows

AS INDIA looks set to lose its investment grade rating, are the Bric nations starting to tumble? The last ten years have seen investors flocking to the vaunted opportunities available in the markets of the Bric grouping of Brazil, Russia, India and China. Over that time, Bric indices have almost quadrupled their gains and their economies have expanded at four times the rate of the US. With the rise of emerging market-based exchange-traded funds (ETF) and other vehicles facilitating retail investment in previously closed economies, investors in the west clamoured to get their hands on the Bric growth story. But is the gold rush over? Certainly, questions are rightly being asked – as Europe deteriorates and its demand for emerging market exports fall, coupled with emerging market inflation problems and fears of a Chinese hard landing, the Bric package does not seem the attractive opportunity it did ten years ago.

Ratings agency Standard and Poor’s has warned that India may become the first of the Brics to lose its investment grade rating. Threatening to junk India, it says that Indian authorities may be unable to react to economic shocks quickly enough to maintain its current creditworthiness. A note on the agency’s negative outlook states: “Slowing GDP growth and political roadblocks to economic policymaking could put India at risk of losing its investment-grade rating, which is just one notch above speculative grade and carries a negative outlook.”

And it is not just India that is struggling. The European crisis has been a drag on Russian stocks, while an overheating real and falling commodity prices have hit the Brazilian market below the waterline (both rated BBB, one notch above India). China appears to be in a more stable position at AA-, but its slowdown may have some way to go. Authorities have reined in inflation a little, and are trying to suppress property prices, which is harming investors.

During the ten years of growth, supporters of Bric investment opportunities lauded the ability of state-driven capitalism to push through the changes required to allow emerging economies to compete with their Western liberal counterparts. But as the Brics struggle with inflation and malinvestment, this run appears increasingly less certain. It can convincingly be argued that the Brics are a disparate group which are better considered individually rather than as a grouping. But they do share common difficulties with transparency, corporate governance and political interference – and this leaves a lot of questions that need to be resolved for the Bric success story to continue.