BRICS may not be strong enough to buoy global economy
September, 02nd 2011
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 US companies with the most developing-nation revenue fell 15% since April, the biggest drop since the bull market began in 2009. Avon Products Inc.
(AVP), which gets at least 74% of operating profit from emerging markets, sank 15% in New York last month. Siemens AG (SIE), which doubled sales from the nations in five years, lost 21% in Frankfurt, the most since October 2008.
During the US 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% even as America was still contracting.
While emerging countries produced about 85% 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.
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 in Brazil, 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 on Wednesday.
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% 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 developingnation growth next year to 6.1% from 6.7%.
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% in the fourth quarter of 2007 even as the MSCI Emerging Markets Index rose 3.4% and analysts at Merrill Lynch & Co. and Morgan Stanley said developing nations would "decouple" from the US 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% of sales on average, sank 57% 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% while the MSCI emerging gauge dropped 11% and the MSCI World index of advancedcountry shares retreated 8.4%.
Avon, the world's largest door-todoor cosmetics merchant, reported a 4.5% decline in second-quarter revenue from Asia and said growth in central and eastern Europe slowed to 5.4% from 9.7% a year earlier, when it published financial results on July 28.
The company's shares have declined 23% in the past 12 months, compared with a 16% 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 longterm 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% to $4.46 billion, profit fell 14%. Shares of the New Yorkbased bank retreated 19% last month, more than the 11% drop in the S&P 500 Financials Index.
Whirlpool, based in Benton Harbor, Michigan, relied on developing nations for at least 32% of its second-quarter revenue, according to data compiled by Bloomberg. The world's largest appliance maker reported a 92% plunge in operating profit in Asia, more than the 62% decline in North America, the data show. Whirlpool's shares fell 8.7% in August, extending this year's retreat to 29%.
Siemens's expansion into emerging markets has contributed to an 11% 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% of revenue during the period. Siemensis valued at 12 times reported profits, the lowest level on a monthly basis since September 2002.