(06/06/13) Outlook for Emerging Markets

Key emerging markets have done poorly so far in 2013, and MoneyShow's Jim Jubak assesses the outlook for two of these economies in the months ahead.

If you thought that things couldn’t get a whole lot worse in the big emerging markets of China and Brazil, well, you were wrong.
What we’re getting here is this really nasty combination of inflation and lower growth.

In China, we’re not seeing inflation so much yet, but we are seeing lower growth and worries on the credit side that the government might be willing to let banks make more loans. Therefore, if not inflation in terms of consumer prices, at least inflation in terms of asset prices.

Chinese leadership has indicated on the one hand that they’d be OK with 7.5% growth. Yet on the other hand, when it comes to creating more credit through the banking system, they’re behaving as if 7.5% growth is too little. It’s not at all clear what’s going on.

We might get stagnation because no one is willing to come down on one side or the other and lower growth. And 7.5% doesn’t seem like it's low growth for most economies in the world, but for China and the commodity markets that depend on China, it would definitely be a disappointment.

That’s still better than what we’re seeing going on in Brazil. In Brazil, what we’re getting is growth more like 2% to 2.2%, but we’re seeing inflation at the same time. We’re seeing inflation in April of almost 6.5%. That's the top of the government’s range of 2.5% to 6.5%.

The government has started to talk about raising interest rates as a way to get inflation lower. That works except that your economy is already growing very, very, very slowly. 2.2% growth is not enough of a cushion to let you raise rates without it really sort of tanking the economy.

In Brazil, you’ve got a situation where you have inflation going up, the Brazilian currency is going down, which of course, is producing higher prices for higher costs for imports. All this is leading to a situation where there doesn’t seem to be any good way out.

The Central Bank is sort of hoping that things are going to get better. But economists and investors are starting to say well, Brazil is going to have to raise interest rates in order to get rid of this inflation problem, and that’s going to take the economy from 2.2% growth even lower.

All this means is that if you’re a global investor and looking around the world, you’re not seeing a whole lot of reasons to look at these two big emerging markets and say "I’d like to put money there." It means that the US, perhaps by default, perhaps because its economy is growing decently, still looks like the best bet in the world right now.