Talking Economics: Bother in the BRICS
There were limited growth changes made to our emerging markets forecast, but all of the BRIC members face challenges this year, with sentiment on India beginning to turn.
17 June 2015
Russia: unwarranted optimism
As a result of better-than-expected first quarter GDP growth of -1.9% year-on-year, we have revised our year-end growth estimate up slightly, but still expect a 4% contraction.
Two key risks persist:
- The oil price (which remains unlikely to return to its 2014 average this year)
- The Ukraine situation (which remains tense).
On the monetary policy front, the central bank has embarked on an interest rate cutting cycle which we expect to take rates to 10% by end-2015, given growing economic weakness and the expected peaking of inflation.
As a small positive for Russia, rouble strength in recent weeks has enabled the central bank to begin rebuilding reserves following months of heavy outflows.
Brazil: Dilma spiralling down
Continued economic weakness, combined with other disappointments, has prompted us to revise down our growth forecast to -1.8% in 2015.
However, we have upgraded our inflation forecast to just shy of 8% in 2015, although this is partly driven by one-off factors.
Once these fade, we expect inflation to ease in 2016. In fact, we see it being sufficiently low in the first quarter of 2016 as to allow the central bank to preemptively reduce interest rates by 50bps in the fourth quarter.
However, if there is a "taper tantrum" repeat in response to the Fed’s expected rate hike, a Brazilian rate cut looks much less likely.
India: sentiment sours
The modest pace of reform implemented since Narendra Modi’s electoral victory last year has been largely in line with our expectations.
Consequently, we do not yet revise our growth forecasts, though failure to deliver some reform in the next session of parliament would present downside risks.
On inflation, we have revised down our forecast for this year driven in large part by lower food price inflation, although the risk of an El Nino event means inflation could surprise to the upside.
We expect two more interest rate cuts this year given the low inflation, taking the policy rate to 7%, but no more than that given the desire to hit an inflation target of 4% in the medium term.
China: stimulus accelerates
The growth outlook for China this year and next is unchanged at 6.8% and 6.5%, respectively. In response to weak growth, authorities have stepped up monetary policy easing measures.
However, we have also seen some backpedalling on fiscal reform recently, and regulations compelling banks to lend to local governments to help fund infrastructure projects.
The combination of easing and regulation seems designed to force banks to finance fiscal stimulus, with some help from the central bank.
For this reason, we do not upgrade our growth expectations despite the more aggressive stimulus; it is merely allowing our original base case to play out.
Important Information: The views and opinions contained herein are those of Schroders’ Investment team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. UK: Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA, is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Further information about Schroders can be found at www.schroders.com US: Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc, a SEC registered investment adviser and is registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan providing asset management products and services to clients in Canada. 875 Third Avenue, New York, NY, 10022, (212) 641-3800. www.schroders.com/us