Remember when the BRICS nations were all set to surge into the forefront of the global economy? Brazil, Russia, India, China, and South Africa were all seeing spectacular economic growth and attracting huge amounts of foreign direct investment. These nations are still substantial actors on the world stage but their growth has slowed and in some cases reversed course. Investors have been pulling their money out of these markets and putting it into the USA, Europe, and Japan. So, what happened? Why are investors leaving emerging markets?
China Moves to Adjust Its Economy
China helped lead the way out of the financial crisis and the Great Recession by doubling down on their investments in both infrastructure and industrial capacity. Nations, like Brazil, saw huge benefits as China’s industrial machine consumed more and more raw materials. The price of oil skyrocketed making not only OPEC happy but also Russia and Brazil. China had been expanding its state-run economy for years and steadily increasing its customer base to span the globe.
But, as large as the world economy is, it is finite. And, the industrialized economies of the world got tired of seeing jobs and whole industries pivot to China. China had over-built its industrial base and now saw a substantial slowdown in growth, closing factories, and even labor unrest. A slower Chinese economy needed fewer raw materials and the emerging markets suffered.
Rich Chinese saw the slowing of China’s miracle expansion and started a capital flight that still threatens the country’s economy. China’s economy is now under pressure due to a trade war with the USA.
Russian Adventurism Brings Sanctions
In 2014 we wrote about investing in Russia after the annexation of Crimea and support of separatists in Ukraine in parts one, two, and three. Russia was hurt by the fall in oil prices that year and is still hurting. Then, the EU and USA levied economic sanctions that greatly reduced investment in Russia and the ability of Russians to use the international banking system. With Russia meddling directly in elections in Europe and the USA, it is unlikely that these sanctions will be lifted any time soon.
Political and Economic Chaos in both Brazil and South Africa
When the BRICS first met officially in 2009 the Brazilian president, Lula de Silva, was commonly called the most popular politician on the planet. Today he is due to start serving a 12 year prison term for his involvement in governmental corruption. Jacob Zuma was the president of South Africa and was recently forced out of office by his own political party. Along the way the focus was no longer the spectacular growth of Brazil but Brazilian bankruptcy. South Africa’s GDP was $400 Billion in 2011 and $295 Billion in 2017.
Trade War and a Strengthening US Dollar
Trump did not start a trade war with nations like Brazil. But, if and when a trade war slows economic production in China, Europe, or anywhere, the emerging markets get hurt. A couple of years ago we wrote about the resource curse of boom and bust cycles. Nations like Brazil, Russia, and South Africa are rich in natural resources. When demand goes up they prosper and when demand goes down they suffer. And, another result of the trade war ramping up is that the US dollar is getting stronger. The dollar is perceived to be a safe haven currency and the US Federal Reserve is steadily raising interest rates. Investors are leaving emerging markets to flee to dollar-denominated assets, and to flee to the USA where markets are still healthy.
Why Are Investors Leaving Emerging Markets? PPT