Home > 2013 Emerging Markets Forecast: Forget About The BRICs and Buy These Rising Stars Instead
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2013 Emerging Markets Forecast: Forget About The BRICs and Buy These Rising Stars Instead

November 14th, 2012

Martin Hutchinson: Savvy investors know there is far more to the markets than sitting on your hands worrying about the fiscal cliff

Believe it or not the world doesn’t revolve around the United States-or the Western world.

In fact, The IMF’s World Economic Outlook projects an emerging markets forecast with growth at 5.6% in 2013. That’s down slightly from 2011 but far ahead of the measly 1.5% growth projected in the “advanced” economies.

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That means investors need to focus heavily their investments in emerging markets, as we have done successfully over the past few years.

However, there’s one new trick investors will have to learn going into 2013: the BRIC economies (Brazil, Russia, India and China) that have been so fashionable over the years, will all run into trouble next year and should be avoided.

The good news is the world is a big place and there are still emerging markets that offer investors the benefit of the world’s fastest economic growth. My favorites are listed below.

But first you need to understand why the BRICs lost their luster.

2013 Emerging Markets Forecast

When Jim O’Neill of Goldman Sachs coined the BRICs acronym in 2001 it looked clever since all of them were poised to grow very rapidly and become major factors in the world economy over the next decade.

Of the four, Brazil looked like the weakest member at the time, since it was hovering close to bankruptcy. Meanwhile, Russia had a dynamic new leader, a new “flat tax” and incredible natural resource wealth.

As for the Far East, China was China, even then.

And India had a genuinely reformed its government under Atal Bihari Vajpayee, which helped cause growth to accelerate to very un-Indian levels.

I didn’t trust Russia or Brazil, and China was difficult to buy back then, but I doubled my investment in the next three years on a simple investment in the Morgan Stanley India Investment Fund (NYSE:IIF).

With Goldman Sachs (NYSE:GS) recommending them, all these BRICs had to do was keep their governments under control and maintain a reasonable facsimile of free-market policies, and they would be rich within a generation — or even sooner.

Indeed the progress over the intervening decade, in terms of Gross Domestic Product (GDP), has been rapid in all four countries. Yet in the wake of the financial crisis all four stock markets have been pretty disappointing, and now the prospects of the BRICs are nowhere near as bright as they once were.

You can chalk it up to the curse of too much money.

In the last decade monetary authorities worldwide, led by Fed chairmen Alan Greenspan and Ben Bernanke, have kept interest rates too low. Money has flooded into the emerging markets, especially the favored BRICs.

The result has been a surge of corruption in all four BRICs, accompanied by a surge in “malinvestment,” a term beloved of the Austrian school of economists and describing investments, like the Nevada housing market in 2004-06, that is entirely misdirected and a waste of resources.

In China, the economy is slowing and there is a gigantic morass of bad loans in the banking system, perhaps five times the size of the bad loans about which everyone worried a decade ago. A 2008-style banking collapse and government bailout in China seems inevitable – and we know what that does to an economy!

In India the fine Vajpayee government of 1998-2004 was replaced by an ungrateful electorate with a return to the socialist Congress party, which had wrecked India’s economy from 1947-1990.

The budget deficit in India, by both the central and regional governments, is gigantic now and is “crowding out” the private sector from the financial market. We also can expect a surge in inflation and a balance of payments crisis. Fortunately, there’s another election in 2014; we can hope that the Indian voters do a better job than in 2004.

As for Russia, Vladimir Putin has effectively established himself as President for life, and has taken control of the economy’s major sectors. The Rosneft buyout of TNK-BP indicates that the Russian state will use its resources to assert economic control. This is already working poorly, and it will stop working altogether when the price of oil drops.

Finally, Brazil is meddling in its major companies such as Petrobras and Vale, whose results have sharply deteriorated. Public spending is way out of control, mostly through subsidized loans from the state bank BNDES. Like Russia, Brazil will fairly quickly run into a balance of payments crisis and certainly won’t enjoy its past rapid growth.

Since investors saw BRICs as a bloc on the way up, they will almost certainly panic simultaneously about all four on the way down, and cause a global financial crisis involving all four. That’s if the Eurozone’s problems or Japan’s government debt don’t cause one first.

Three Emerging Markets to Buy

As investors, we can only protect ourselves to a limited extent, and certainly should not “sell at the bottom,” as some unfortunates did in early 2009. Certainly we should not put our money in any of the BRIC trouble spots.

However,there are other emerging markets whose prospects remain excellent. They include Singapore, Chile and the Philippines. Here’s why emerging markets are better bets in 2013:

  • Singapore is now at European standards of wealth and is projected by the Economist team of forecasters to grow by 4% in 2013 after a slowdown in 2012. It also ranks top or close to it on international indexes of integrity and business-friendliness. Try the iShares MSCI Singapore index ETF (NYSEARCA:EWS).
  • Chile remains the best-run country in Latin America, with high scores on integrity indexes and a strong mineral sector. Aberdeen Chile Fund (NYSE:CH) is the recommendation here.
  • The Philippines has been off most investors’ radar screens, but is expected to grow 6.0% in 2013. The iShares Philippines Investible Market Index ETF (NYSEARCA:EPHE) gives investor coverage of this market, although at 17 times earnings currently its pricing is a little rich.

So yes, the parts of the world may be troubled right now, but that doesn’t mean investors need to stay on the sidelines. With the right emerging markets, real growth is easier than you think.

Written By Martin Hutchinson From Money Morning

Martin is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor  to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of  the Financial Services Volunteer Corps, Hutchinson became an advisor to  the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what  they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.

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