BRICs Reel Under Rising Inflation
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Editor’s Note: “Don’t look now… but the BRICs are falling,” says The Sovereign Soceity’s global investment expert Mike Burnick.
Mike is worried by rising inflation rates in the so-called ‘BRIC’ emerging markets: Brazil, Russia, India and China.
India is particularly hard hit. This week the central bank there signaled it would keep raising borrowing costs to mixed reviews.
Indian inflation was driven by the first increase in retail prices of gasoline and diesel this year. The International Herald Tribune reports that,”India joined China, Indonesia, Malaysia and Sri Lanka as a near doubling of oil prices pushed up costs and eroded profits of refiners.”
It’s also worth keeping in mind that BRIC nations have still relatively small economies compared to the US, Europe and Japan.
“If you look at them in real (and not in overly flattering purchasing parity power) terms,” says The Global Guru editor Nicholas Vardy,” the BRIC countries are best compared with large U.S. states in terms of economic heft. China and its population of 1.3 billion generate as much economic wealth as do the 60 million inhabitants of California and Texas. India’s economy is the size of Florida. Brazil’s is the size of New York. And Russia is smaller than Ohio and Illinois combined.”
BRICs Crumble Under Threat of Inflation
By Mike Burnick
The most popular group of fast-growing emerging market countries which includes: Brazil, Russia, India, and China are facing their biggest economic challenge this decade. Like everywhere else on the planet, inflation is picking up in the BRIC economies but it’s much worse over there and central bankers are responding by raising rates and tightening monetary policy.
While these rate hikes may be necessary to fight inflation, tight money policies are usually a very unfriendly environment for stock investors.
India is the latest BRIC under fire. Wholesale price inflation is running at 11%. That’s the highest level in 13 years and climbing. So the Reserve Bank of India responded last week by raising its benchmark lending rate to 8%. Global investors are signaling a vote of “no confidence” in the central bank move, because they sent Indian stocks plunging.
India’s currency, the rupee, is also under attack, having lost 8% of its value against the dollar this year, the worst performance for the rupee since 1993.
India is in the riskiest position among the BRICs when commodities are soaring like this. That’s because India is a net importer of most resources, including 75% of its oil.
It’s possible India’s troubles are perhaps just an early-warning sign of other troubles to come for the BRICs. Inflation in China is running close to 8% in spite of several interest rate increases last year. Inflation just topped 15% in Russia. Brazil, which suffered a painful hyper-inflationary past, recently raised interest rates after inflation crept up to 5.4%.
Seeing this threat on the horizon, stock investors have been busy pulling money out of some BRIC markets. China’s CSI 300 Index is down over 50% from its 2007 high, while India’s Sensex Index has plunged by one-third in value. Share prices in the first two markets of the BRIC alphabet, Brazil and Russia, have so far held up relatively well. This is due in no small part to their favorable trade terms and the fact that both are resource-rich exporters.
All of the BRICs are threatened by the risk of inflation. As an Indian government official put it, “Until inflation slows, this crisis is only going to widen.”
MIKE BURNICK, Senior Editor
P.S. Speaking of inflation, the big Fed rate decision comes this afternoon. We’ll find out whether Bernanke will really “get tough on inflation” as he has claimed in the last few weeks. Keep an eye on the news because there will be some very real profit opportunities once the decision hits the headlines.
Source: BRICs Crumble Under Threat of Inflation
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Tags: Bank Of India, Bric Countries, China Indonesia, Economic Challenge, Economic Wealth, Editor Nicholas, Emerging Market Countries, Global Investment, Indonesia Malaysia, Inflation Rates, International Herald Tribune, Investment Expert, Mike Burnick, Popular Group, Price Inflation, Reserve Bank Of India, Stock Investors, Tight Money, Tribune Reports, Unfriendly Environment, Wholesale PriceAbout the Author
Mike Burnick serves as a Senior Editor and Director of Research for The Sovereign Society and editor of Market Shock Trader and Global Market Investor. He also hosted his own investment radio program. Mike is the founder and president of Jupiter Capital Management, an investment advisory firm.
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