There are no two ways about it – markets don’t love themselves at the moment. Volumes are poor, price action is poor and, it would appear, so is most of the investing community.
I was speaking to the CIO of a large pension fund at the end of last week who reckoned that if he got to the end of Q1 with a flat performance across his balanced, multi-asset portfolio he will have not done too badly.
The misery which has befallen emerging markets isn’t exactly news but there was another case of kicking the player while he’s down last night as S&P downgraded Brazil’s long-term foreign currency credit rating to BBB- from BBB. That the country’s payments position wasn’t improving has been common knowledge for some time but the speed of the agency’s action coming just two weeks after its site visit surprises.
After the Eurozone crisis during which the ratings agencies were castigated for apparently having played politics with the timing of their ratings actions, they have been pretty cautious in what they have said and when. This speedy move on Brazil, however, somehow throws the shadow of a wagging finger. Presidential elections are due in October and there is the minor matter of some kind of sporting competition there this summer too. It looks to me as though S&P is trying to knock heads together and to get the powers that be to focus on principal issues first.
Crumbling
All the while the BRICs are, to coin a phrase, crumbling. Brazil is mess. India’s GDP growth has fallen back to 4.1%, the lowest in a decade. Russia – well that’s another subject. That leaves us with China which might suddenly find itself alone and referred to as “The big C”. Let’s face it, India and Brazil to a greater extent and Russia and China to a much lesser extent failed to use the boom times to apply any of the structural changes to their economies which might have seen them on the path of the only economy to truly break out of the emerging bracket – Korea.
It has taken Korea roughly 40 years of hard graft and iron discipline to fight its way to the top table. Of the BRICs, only China seems to have anything like the determination to do the same and as we know it has a long way to go before the wealth it is creating trickled down to the massed ranks of the rural poor.
Brazil looks like an opportunity not only missed but never even taken seriously beyond electoral rhetoric. Whether S&P can do anything to change that is doubtful but it can rest assured that if things do go pear-shaped, it will not stand accused of having done nothing. The agencies, bless them, are damned if they do and damned if they don’t.
Russia, meanwhile, continues to tax the minds. Markets, for lack of ability to price political risk, have broadly decided to ignore the situation. Perhaps the most incisive analysis - and there is a lot out there (mainly nonsense) comes from Raja Visweswaran in Hong Kong who writes “So now the only response to Crimea is that the G8 became G7… which may be fine until you remember the qualifications of who’s left. Let’s see now – France (no economy), UK (no government), Germany (no army) and Italy (none of the above). Right – I can see the Russians quaking in their boots already …”
More to the point, away from the old powers of the West, nobody seems to have too much of a problem with Russia’s actions. It might find itself put on the naughty step by seven eights of the G8 but when it comes to the G20 it is hardly going to find itself excluded. The wording of the law passed by the Duma which permits the government to do “whatever it takes” – where have I heard that before? – to protect Russian minorities in surrounding countries has Western Europe getting worried (and without a shadow of a doubt the countries in question too) but Russia has worked out that NATO has not got the means, the stomach or the ability to stop it.
Blocking the assets of a few oligarchs and “out-viting” Putin from the G8 isn’t going to cut a lot of mustard with the ex-head of the KGB who avoided the block on serving three consecutive terms as President by resting in the Prime Minister’s office for one legislative period. ’nough said?
Clearly too little too late. I suppose Raja’s analysis covers most of it, other than the USA which could be added with no need for Russian energy.
Oh, and if you want to know what I think of markets today, I’m afraid I haven’t got a clue. The only real buying we’re seeing is of protection.
This doesn’t seem to be a good time for contrarians.