Tuesday, June 24, 2008

Caution - BRIC Falling!

Investors who have been counting on more of the vigorous earnings growth that attracted them to emerging markets in the first place are in for a very big disappointment. Such expectations, Dee declares, "will be crushed." The great unwinding of emerging markets has just begun, he avers, "with much carnage still forthcoming."
S. Dewey Keesler - SDK Capital in Barrons

What goes up must come down
The story was too good to be true and skipped the fairy tale ending. The darlings of the past few years - India & China are showing signs of fatigue. The stock markets are getting pummeled which was being predicted due to the hype and speculation built into the stocks.

Other worries are starting to hound these economies. India is dealing with rampant inflation (whole sale price index is up a whooping 11%) which is causing it's central bank to raise rates and increase margin requirements. Wage inflation is starting to affect the competitiveness of the outsouring industry and infrastructure woes keep growth constrained.

"India's wage inflation, which approached an estimated 14 percent last year, is a natural byproduct of a classic supply-and-demand scenario."
Will India price itself out of offshore market?

China's short-term growth trajectory is tied to the Olympics which comes with it's own set of issues.

High commodity prices, especially stratospheric oil prices are crimping China's manufacturing prowess. The breakneck growth in China is also exposing the toll on the environment, social readjustment and political challenges. BusinessWeek recently opined that it might be time for jobs to move back to the US from China.
" The economics of global trade are starting to tilt back in favor of the U.S. to a degree unseen in a generation."

So where are we headed? Is the correction in the emerging markets over? Are India & China headed towards the next economic super power status? Is the world truly decoupled? Will the US economic slowdown drag down the world economy?

I am not sure where we are headed in the short-term. The growth in emerging markets is for real and long-term investment prospects are probably bright. Time will tell how the global economy fares in the next 5-10 years.

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1 comment:

Chad @ Sentient Money said...

This recession will show whether the emerging markets are for real. If they can get hammered economically and then start growing again, they will show they are for real. However, that will put more pressure on oil. We desperately need more Alt Energy.