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Wednesday, December 28, 2011 4:30 PM

Update on Brazil, BRICs

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In response to Brazil is World's 6th Largest Economy, Overtaking UK Earlier this Year. Can Brazil Overtake France by 2016? What about BRICs in General? I received a nice email from Felipe Fiel, an economist from Brazil working in the hedge fund industry for Fram Capital.

Felipe writes ...

Hi Mish, hope is all well with you. First of all I would like to congratulate you for your blog and outstanding contribution do financial observers. I´m an economist who lives in Brazil, working for the hedge fund industry.

I agree entirely with you about Brazil´s skepticism.

I would like to highlight that the way you show inflation and GDP might cause a distorted impression to your readers.

You show GDP growth quarter-over-quarter seasonally adjusted, without annualizing it, which is the norm for US viewers. It was running at almost 8% annualized growth before 2008 crises and even recently it grew at 3.2% in the 4 quarters before stagnating in 3Q.

For next year, even the most pessimistic projections see growth at 4.3% on average, which is more or less what is seen at GDP potential. However, I personally think we cannot growth at that rate without generating too much inflation.

Felipe Fiel
BRIC Decade Ends as Growth Peaked

According to Goldman Sachs, BRIC Decade Ends as Growth Peaked
Dec 28, 2011

In the past decade, mutual funds poured almost $70 billion into Brazil, Russia, India and China, stocks more than quadrupled gains in the Standard & Poor’s 500 Index and the economies grew four times faster than America’s.

Now Goldman Sachs Group Inc. (GS), which coined the term BRIC, says the best is over for the largest emerging markets.

BRIC funds recorded $15 billion of outflows this year as the MSCI BRIC Index sank 24 percent, EPFR Global data show. The gauge, which beat the S&P 500 by 390 percentage points from November 2001 through September 2010, has trailed the measure for five straight quarters, the longest stretch since Goldman Sachs forecast the countries would join the U.S. and Japan as the top economies by 2050.

BRIC indexes may fall another 20 percent next year, buffeted by the liquidity squeeze stemming from Europe’s sovereign debt crisis, Arjuna Mahendran, the Singapore-based head of Asia investment strategy at HSBC Private Bank, which oversees about $499 billion, said in an interview. Nations such as Indonesia, Nigeria and Turkey may overshadow the BRICS in the next five years as they expand from lower levels of growth, he said.

“The slowdown we’re seeing in the BRICs will continue for most of the first half,” Mahendran said. “Compared to the U.S., corporate profits haven’t been that good as companies face higher wages, higher interest rates and currency volatility, and at best, we’ll only start to see the effects of monetary policy loosening in the second half of 2012.”

2011 Losses

The BSE India Sensitive Index led declines among BRIC equity gauges this year, falling 23 percent. China’s Shanghai Composite Index also dropped 23 percent, while Russia’s Micex retreated 18 percent and Brazil’s Bovespa sank 16 percent. The 21-country MSCI Emerging Markets Index (MXEF) lost 20 percent, while the S&P 500 gained 0.6 percent.
The time to warn about BRICs and emerging markets was a year ago, which I did, specifically in regards to China (but also with many references to trade surplus nations and commodity producers throughout the year).

Mike "Mish" Shedlock
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