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The Potential of the BRIC Nations

Posted by ICMC Staff on 17 February 2010 | 1 Comments

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THE POTENTIAL OF THE BRIC NATIONS

Why emerging market equities have the world’s attention.


Brazil. Russia. India. China. These four nations have some of the fastest-growing economies on earth and are becoming drivers in the world economy. In the coming decades, they may command as much attention as the U.S., Japan and other “heavy hitters” … or more.

The future aside, we know one thing about the BRIC nations and other emerging markets: collectively, stocks in these countries have outperformed U.S. stocks for the last 20 years.

During this past decade alone, the MSCI Emerging Markets Index brought a total return of 102.4% while the S&P 500 posted a total return of -10.0% (-24.1% before dividends). Across the 1990s, the S&P 500 produced a total return of 432.0% - pretty impressive. Yet the MSCI Emerging Markets index posted a total return of 2408.6% for that decade.(source)(source)

Great volatility … but also great potential. If U.S. stocks soar or fall, emerging markets really feel the effect. We’ve seen them recoil in the first quarter of 2010. Yet short-term slumps aside, there are compelling arguments for investing in emerging market equities as part of a diversified portfolio.

Look at last year’s returns
. In 2009, the benchmark index in Brazil (the Bovespa) gained 82.66%. Russia’s RTS gained 128.62%. India’s Sensex 30 advanced 81.03% and China’s Shanghai Composite rose 79.98%.(source)

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China, Japan and our Debt

Posted by Kevin on 17 July 2009 | 0 Comments

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Will other countries keep buying our Treasuries?

If China and Japan change their minds, could the United States have a problem? Since 1980, the U.S. has imported more than it has exported.1 The U.S. government makes up for this trade deficit by issuing Treasury bonds and other debt instruments. Foreign governments have long lined up to buy them.
 
China holds almost $800 billion of U.S. Treasuries. That?s the April 2009 figure from the U.S. Treasury (at this moment, the most recent data). In addition, Japan has $686 billion in Treasuries. Hong Kong has $81 billion, Taiwan $78 billion, Singapore $40 billion, India $39 billion, and South Korea $35 billion. Away from Asia, Great Britain holds $153 billion, Russia holds $137 billion, and Brazil holds $126 billion. 2 U.S. Treasury bonds offer these institutional investors some stability in uncertain times.
 
Are China and Japan wary of buying more? Earlier in the decade, China, Japan and other nations readily bought Treasuries. From 2004-2008, China spent as much as 14% of its GDP on the purchase of foreign debt - mostly American debt.3
 
What happened as a result? China, Japan and other creditor countries got a nice return on their investment and a strong export market. We got to buy inexpensive imports. This kept the dollar strong and interest rates low.
 
Now we have two problems that could potentially sour this relationship. The economies of China, Japan and other countries have suffered along with ours in the global recession. Moreover, the U.S. has run up a huge budget deficit to accompany its trade deficit. President Obama is on record as saying that we may have trillion-dollar deficits for ?years to come.?
 
Under these conditions, China and Japan are naturally getting leery of holding so much American debt (especially when the Federal Reserve is printing money to buy it). China needs to pay for its own $600 billion stimulus package, and Japan announced a $154 billion stimulus in April. Tax revenues in both economies have declined with the recession. Government regulators in China have ordered banks to direct money this year to local governments and small- and medium-sized businesses. All this means China and Japan aren?t as eager for dollars and Treasuries as they were a few years ago.3, 4
 
What if other nations stop buying our debt? There are three potential side effects. One, interest rates would likely increase as there would be fewer buyers for Treasuries. Two, the dollar could weaken. Three, long-term bond prices could fall.
 
Voices on the fringe worry about a scenario in which the central banks of China, Japan and other nations jettison dollars en masse or abruptly quit buying U.S. debt. Realistically, the odds of something like this happening are slim. These countries would have nothing to gain by stifling America?s chances for economic recovery, and these decisions would greatly harm the world economy.
 
Now for some good news. In May, our trade deficit fell to its lowest level since November 1999. It shrank 9.8% in May from April levels, defying analysts? expectations ? and offering a hint of economic recovery. Our deficit with China increased by $4.4 billion for May, but the 2009 increase is 12.6% under last year?s pace. The U.S. deficit with Japan reduced to its lowest level in more than 20 years last month.5
 
More good news. Domestic and foreign demand for Treasuries is still strong ? in its auction in the first full week of July, the Treasury quickly sold $19 billion of 10-year notes, with Treasury yields hitting 6�-week lows.6 At least in the short term, it appears the government doesn?t have to struggle for buyers to fund its reforms and rescue efforts.
 
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Citations.

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"It's tough to make predictions, especially about the future."
— Yogi Berra