There are many different one-liner jokes in the world, including the series that starts with “You know you’re in trouble when…”
You know you’re in trouble when the captain of your cruise ship runs toward the railing in a life vest.
You know you’re in trouble when your accountant’s resignation letter was postmarked in Zurich.
Now we can add one from the world of finance: You know you’re in trouble when Greece outpaces your stock market.
From the end of 2012 through the middle of August, all four BRIC countries could claim this dubious distinction. In U.S. dollar terms, Brazil’s stock market was down 29.9%, Russia’s market was down 14%, India’s market had fallen 21.4%, and China’s market had dropped 7.1%.
During that same period, the Greek stock market had posted a 1% return.
Of course, it is possible the Greek market is simply at a standstill, providing no gain or loss because the country is in a deep freeze, but we’ll leave that line of thought for another day. The point here is all about the BRICs… and how they have fallen.
In large part, global consumption drove the incredible growth in these four countries – along with many others around the globe – over the past fifteen years. The thirst for energy and gadgets exploded during the late 1990s and early 2000s, giving raw material providers and cheap labor countries an incredible boost to their economies and their markets.
Yes, the 2008 financial crisis briefly hit these providers, but then the central banks of the world took over.
As they flooded the world with cheap capital, providers of raw materials and cheap labor got their second wind. It seemed for a couple of years – from 2009 through 2011 – that these countries would be able to take a pass on the fallout from the greatest financial upheaval since the 1930s.
As a bubble in debt and asset prices in emerging markets replaced the one in the developed world, everyone exhaled a collective sigh of relief. The feeling was that a rise of economic activity in these young, developing nations could offset a drop in activity in the aging countries of the world. This view held for a while, then reality snuck in the door.
It turns out that, while these youthful economies do have legitimate domestic consumption and growth, most of their outsized gains are reliant on selling to those stodgy, old, Western economies – as well as Japan – that are now in a funk.
Without the U.S., the European Community and Japan buying more and more, the BRICs had to devise their own plan for creating growth, which typically involved extending a lot of credit on easy terms. We all know how this story ends – with lots of bad loans and questionable assets on bank books.
The last six months have been something of a wakeup call, with many previously high-flying countries that rely on exporting to either the EU or the U.S. – or their suppliers – pushed back on their heels.
In U.S. dollar terms, South Korea is down over 10%, Mexico has dropped more than 6%, and even Canada, which is not a young country but is definitely a raw materials supplier, has fallen by 3.6%. In fairness to our neighbor to the north, their stock index is up 1.1%, but adjusted for currency movement the return is -3.6% in U.S. dollar terms.
As we move into the fall of 2013 and turn the calendar to 2014, we expect this trend to continue.
Economic activity in the U.S. is steady, at a very low level. There are no signs of a robust explosion to the upside. Likewise, Europe is not spiraling down, but it’s not on a soaring trajectory either. This leaves the BRIC economies and their compatriots to deal with growth internally… and now to deal with their own mini-credit bubbles and locally inflated asset prices.
In addition to taking a backseat to Greece when it comes to market returns, it is possible that one of these countries or a group of them could trigger the next global financial crisis… and that’s no joke.
Ahead of the Curve with Adam O’Dell
Emerging markets are already under fire. But if history serves as a lesson, it could still get much worse.