ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Emerging Markets Investors Hit the BRIC Wall

Updated on October 3, 2012

Double Digit Emerging Market Growth Gets Challenged

Investor flows continue out of US Equities into Emerging Markets. The commonly held view is that growth in Emerging Markets is faster and greater in magnitude than in Developed Economies that are indebted. Fundamental economic data is however challenging this thesis.

Investors may have been blind-sided by the impacts of Central Bank liquidity since the 2008 Crash. Emerging Markets rallied strongly from 2009, so it was believed that a return to the old high growth rates in Emerging Economies was to be expected. The BRIC countries, especially China, have shown that this is a false assumption. The large injection of Central Bank liquidity created a mis-allocation of resources and inflation in Emerging Markets. China for example, has had a property bubble and an inflation problem since 2009; that the policy makers began to address seriously in 2011. The double-digit growth rates, that Emerging Market investors have become accustomed to, suddenly look challenged by the attempts of policy makers to address inflation and asset bubbles. China has experienced a hard landing; created by the policy makers' attempts to cool the economy, in addition to the fall in global demand.

Emerging Markets Growth Double Dip
Emerging Markets Growth Double Dip | Source
Emerging Markets FX Reserves ($blns) Under Threat
Emerging Markets FX Reserves ($blns) Under Threat | Source
Petrobras Margin Pressure From Government Controlled Energy Policy
Petrobras Margin Pressure From Government Controlled Energy Policy | Source
Global Gasoline Price Comparison
Global Gasoline Price Comparison | Source

The Challenge to Emerging Markets From Quantitative Easing

When the Developed Market Central Banks embarked on the Quantitative Easing process, it was assumed that this liquidity would seek out the high returns in Emerging Markets. Experience has proved that this is not the case. The liquidity has in fact gone into the energy commodity complex. Emerging Market economies have been able to grow at high rates, because energy inputs have been subsidized by their Governments.

When the Developed Markets were running up debts and consuming exports from Emerging Markets, these Developing Nations had trade surpluses that could be used to subsidize their energy costs. Now that Developed Markets are deleveraging and not consuming, the Emerging Market surpluses are falling; making it harder to subsidize their energy inputs. India has recently tried to raise energy prices; and the country has collapsed into strikes. Brazil has actually forced primary energy companies and utilities to provide cheaper energy; and as a consequence the equities of these companies have underperformed. It is ironic to observe that Petrobras has become the cash cow that the Government milks to subsidize the economy. This was once a criticism levelled at Russia and its handling of Gazprom. Now only Russia, which has vast energy reserves, has been able to benefit within the BRIC sector. However going forward, as President Putin is under pressure; he may also have to use his windfall from higher energy prices to subsidize his political position.

In September 2012, the Federal Reserve and the ECB embarked on new rounds of Quantitative Easing. If past experience is a guide, the liquidity will not flow into Emerging Market equities; but into inflation hedges. Emerging Markets are a very poor inflation hedge. When there is weak demand for Emerging Market exports, the trade surplus cushion that buffers inflation shocks through subsidized energy prices is no longer there. In the current global environment therefore, Emerging Markets (ex-Russia) are the worst places to invest.

By comparison, America has abundant Natural Gas; and is also emerging as a Shale Oil giant. It is certainly true that America has a bigger debt crisis than Emerging Markets; but America has addressed this through Quantitative Easing. As a consequence of Quantitative Easing, America has also exposed the poor inflation fundamentals in Emerging Markets. America thus has a mitigated debt problem; and the mitigation creates an Emerging Market inflation problem. Both America and Emerging Markets have a growth problem; but the Emerging Market growth problem is dependent upon American growth and subsidized energy. Since America is not growing and is also challenging the subsidized energy business model in Emerging Markets with Quantitative Easing, it is fair to say that America has the economic edge. In addition, America's energy challenge has been addressed.

Thus far, Emerging Markets investors have not thought through this fundamental structural challenge that Quantitative Easing has created for their portfolios. They are still expecting cyclical growth to return globally; which will have a greater Beta impact on Emerging Market equities.When they think through the Quantitative Easing/Inflation dynamic, the flows will reverse back from Emerging Market equities to US Equities.


    0 of 8192 characters used
    Post Comment

    No comments yet.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)