BRICs Are No Cure for Global Economic Growth This Time

Bloomberg

By Michael Patterson and Simon Kennedy - Sep 1, 2011 8:39 AM GMT+0300

Stocks of international companies that depend most on emerging markets for sales show developing nations won’t be strong enough to buoy the global economy.

Goldman Sachs Group Inc.’s gauge of U.S. companies with the most developing-nation revenue fell 15 percent since April, the biggest drop since the bull market began in 2009. Avon Products Inc. (AVP), which gets at least 74 percent of operating profit from emerging markets, sank 15 percent in New York last month. Siemens AG (SIE), which doubled sales from the nations in five years, lost 21 percent in Frankfurt, the most since October 2008.

During the U.S. recession from December 2007 to June 2009, the BRIC nations of Brazil, Russia, India and China became the engines of the global economy, with Chinese gross domestic product expanding 7.9 percent even as America was still contracting. While emerging countries produced about 85 percent of global economic growth since then, China, India and Brazil are slowing after they lifted interest rates to curb inflation following at least $870 billion of fiscal stimulus during the financial crisis.

“The policy driven boom of the past couple of years will not be repeated any time soon,” said Stephen King, chief economist at HSBC Holdings Plc in London and author of “Losing Control: The Emerging Threats to Western Prosperity.” It’s “difficult to see how emerging nations can ride to the rescue once more,” he said.

Slowing Demand

That’s reflected in the stock market, where Avon and Siemens fell about twice as much as the MSCI World Index last month. With expansions faltering in the U.S., Europe and Japan, slowing demand inBrazil, Russia, India and China means more challenges to global growth. An index of Chinese manufacturing was at 50.9, near a 29-month low, the China Federation of Logistics and Purchasing reported today.

Some investors use an expanded BRICS grouping that includes South Africa after it was invited to join the group in December. Africa’s biggest economy expanded an annualized 1.3 percent in the second quarter, its slowest pace in almost two years, data reported on Aug. 30 by the statistics office show.

Emerging economies will probably “avoid a hard landing, but they won’t be able to bail out the world,” said Joachim Fels, chief economist at Morgan Stanley in London. The bank cut its forecast last month for developing-nation growth next year to 6.1 percent from 6.7 percent.

Avon, Whirlpool

Goldman Sachs’s BRICs Sales index, which includes shares of Avon,Citigroup Inc. (C), Whirlpool Corp. (WHR) and 47 more companies, proved predictive four years ago, dropping 5.1 percent in the fourth quarter of 2007 even as the MSCI Emerging Markets Index rose 3.4 percent and analysts at Merrill Lynch & Co. and Morgan Stanley said developing nations would “decouple” from the U.S.

Brazil and Russia fell into recessions and growth tumbled in China and India. The BRIC gauge, whose companies rely on emerging countries for about 50 percent of sales on average, sank 57 percent in 2008, data compiled by Bloomberg show.

From the end of July through the close of New York trading on Aug. 30, the Goldman index lost 8.7 percent while the MSCI emerging gauge dropped 11 percent and the MSCI World index of advanced-country shares retreated 8.4 percent.

Avon, the world’s largest door-to-door cosmetics merchant, reported a 4.5 percent decline in second-quarter revenue from Asia and said growth in central and eastern Europe slowed to 5.4 percent from 9.7 percent a year earlier, when it published financial results on July 28.

‘On Track’

The company’s shares have declined 23 percent in the past 12 months, compared with a 16 percent gain in the Standard & Poor’s 500 Index. Chief Executive Officer Andrea Jung said on a July 28 conference call that the New York-based company’s long- term strategy of focusing on developing countries such as China and India is “on track.”

Citigroup, the third-largest U.S. lender by assets, gets more than half its earnings from emerging markets, CEO Vikram Pandit said in March. While second-quarter revenue from the consumer bank’s Latin American and Asian units rose 13 percent to $4.46 billion, profit fell 14 percent. Shares of the New York-based bank retreated 19 percent last month, more than the 11 percent drop in the S&P 500 Financials Index.

Whirlpool, based in Benton Harbor, Michigan, relied on developing nations for at least 32 percent of its second-quarter revenue, according to data compiled by Bloomberg. The world’s largest appliance maker reported a 92 percent plunge in operating profit in Asia, more than the 62 percent decline in North America, the data show. Whirlpool’s shares fell 8.7 percent in August, extending this year’s retreat to 29 percent.

Siemens Growth

Siemens’s expansion into emerging markets has contributed to an 11 percent increase in marketing and sales expenses in 2011 from a year earlier, the Munich-based engineering company reported on July 28. CEO Peter Loescher said he still wants to grow in these countries, which comprised about 30 percent of revenue during the period. Siemens, whose products range from power turbines to medical scanners, is valued at 12 times reported profits, the lowest level on a monthly basis since Bloomberg began compiling the data in September 2002.

Demand is waning in developing countries as exports to the U.S. and Europe slow and tighter monetary policy curbs consumption at home. The cost of shipping 20-foot box-loads of manufactured goods to Northern Europe from Shanghai has dropped 54 percent during the past year as deliveries slowed, while rates for 40-foot box shipments to the U.S. West Coast fell 35 percent, according to data compiled by Clarkson Securities Ltd., a unit of the world’s largest shipbroker.

Developed Nations

U.S. data last month showed the world’s largest economy grew 1 percent in the second quarter, slower than initially estimated, while German investor confidence slid to the lowest level in more than 2 1/2 years in August.

“The bulk of emerging markets are still dependent on developed-market growth, and that’s not coming any time soon,” said Rajiv Jain, who oversees about $15 billion at Vontobel Asset Management Inc., including the Virtus Global Opportunities Fund, which beat 99 percent of peers this year, according to data compiled by Bloomberg.

Brazil unexpectedly cut interest rates yesterday following five increases in 2011 as the risk of recession in Europe and the U.S. shifted policy makers’ focus away from the fastest inflation in six years. The government is also trying to curb credit growth after loans expanded by at least 19 percent for 12 straight months, leading to an increase in bad debt at lenders including Sao Paulo-based Itau Unibanco Holding SA. (ITUB4)

Tax Cuts

Brazilian President Dilma Rousseff cut 50.7 billion reais ($32 billion) from the 2011 budget two months after taking office in January and Finance Minister Guido Mantega said on Aug. 29 that the government plans to halt a rise in fiscal spending this year. Mantega and former President Luiz Inacio Lula da Silva used tax cuts and housing subsidies to help revive growth in 2009 and 2010.

China lifted borrowing costs three times this year and raised bank reserve requirements six times to combat the effects of a record lending and infrastructure-spending binge that helped revive the global economy two years ago. Consumer prices climbed 6.5 percent in July, the most in three years.

Fixed-asset investment growth slowed the past two months and new bank loans dropped to the lowest level this year in July. China doesn’t need another stimulus plan and should maintain current fiscal policies, said Fan Jianping, director of economic forecasting at the State Information Center, according to a report last month by China’s Securities Times.

Global Recession

Emerging-market policy makers have less room to stimulate demand after government budgets moved to a 2.7 percent deficit this year from a surplus in 2007, according to Nick Chamie, the head of emerging markets research at RBC Capital Markets in Toronto.

RBC and Morgan Stanley cut their estimates for global and emerging-country expansions last month amid a selloff in equities that wiped out almost $5 trillion of market value. The world economy has a 50 percent chance of slipping into recession, Michael Spence, a professor at New York University’s Stern School of Business who won the Nobel Prize in economics in 2001, said in an Aug. 25 interview on Bloomberg Television.

Falling growth expectations in the developed world and lower food and energy prices will ease inflation in emerging markets and allow central banks to stop tightening monetary policy, said Jim O’Neill, the chairman of Goldman Sachs Asset Management who coined the term BRIC to describe Brazil, Russia, India and China in 2001.

Surprise Cut

The S&P GSCI Spot Index of commodities fell 2 percent last month. China let the yuan strengthen 0.9 percent against the U.S. currency in August, making dollar-denominated commodities cheaper.

The board of Brazil’s central bank voted yesterday to cut the benchmark interest rate by a half point to 12 percent. All 62 analysts surveyed by Bloomberg had forecast rates would be left on hold. Turkey’s central bank left its main interest rate unchanged at a historic low on Aug. 23 after a surprise cut three weeks earlier and said there may be more reductions ahead.

Increasing trade between emerging economies will lessen dependence on the developed world, according to Citigroup economists. They forecast trade between emerging economies will jump to 48 percent of the global total by 2030 from less than 25 percent today.

Grow at Home

“I expect a shift back to the emerging markets and that Asia and China will lead the way,” Kirk Hartman, chief investment officer of Wells Capital Management in Los Angeles, said in an Aug. 25 interview on Bloomberg Television. “I like the multinationals.”

Slowing economic growth will curb earnings at companies that rely most on buoyant global demand, according to Vontobel’s Jain, who’s avoiding industrial companies and commodity producers. He owns consumer staples stocks including ITC Ltd. (ITC), the Kolkata-based cigarette maker, and Cia. de Bebidas das Americas, Brazil’s largest brewer, in part because they can boost sales even as the economy slows.

ITC has climbed 15 percent in 2011 and profits may increase 19 percent during the company’s current fiscal year, according to the average of 10 analysts’ estimates compiled by Bloomberg. Shares of Ambev, as the Sao Paulo-based brewer is known, have advanced 6.9 percent and earnings are poised to grow 16 percent, according to the average forecast compiled by Bloomberg.

“Sustainable, quality growth is very narrowly available,” Jain said. “A big part of the emerging-market world is extremely exposed to what’s happening in the U.S. and Europe.”

To contact the reporters on this story: Michael Patterson in London atmpatterson10@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editors responsible for this story: Laura Zelenko at lzelenko@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net