BRIC by BRIC
10/27/2008 12:01 am EST
Eoin Treacy, global strategist at FullerMoney.com, offers an update says not all BRIC emerging markets move in tandem.
BRIC economies were star performers until emerging markets risks were amplified by the credit crisis. Although they [all have] large populations and strong growth, they vary widely in other important aspects, as shown by the fact that they have not moved in unison during this crisis.
Massive repatriation of foreign investments caused steep declines for the equity indices and domestic currencies. The dollar bottoming at the same time as the indices peaked indicated that serious money was being removed from these markets. Now, the dollar is much more overstretched against these currencies. When the dollar tops out against the currencies [it] will strongly indicate that money is ready to flow back into these markets.
Russia paid off USSR-era debts and built a sizeable reserve through oil revenues. Continuing concerns about governance, oil's decline, and fears of further hostilities are all headwinds for the RTS Index. It broke its rising lows in August, has given up 71% of its peak value as it accelerates lower, and is looking remarkably oversold. The government is becoming involved to support the market; however, an upward dynamic is needed to suggest that this liquidation is coming to a close.
Brazil benefited from producing many globally important commodities and is suffering as they retreat. The Bovespa index fell through 60,000 in July. It accelerated lower, but found support near 33,000 last week. It is now retesting the lows and needs to hold above that level to offset potential for some additional downside.
The Indian market was one of the best performers—albeit volatile—with corrections of 30% not uncommon. It accelerated to its peak above 20,000, but broke the progression of rising lows with the fall below 15,000 in June. The Index looks overextended relative to its 200-day moving average, but a sustained move above 15,000 would be needed to break the progression of lower rally highs.
China's A-share market has negligible foreign direct investment and in Hong Kong the local currency is pegged to the US dollar. China has vast reserves to support its economy. The slowdown there was largely manufactured by raising interest rates and reserve requirements. The Chinese have cut interest rates twice in the last month, delayed the appreciation of the currency, cut reserve requirements, and ordered the China Investment Corporation (CIC) to start buying domestic bank shares, all of which point to a change in policy.
The Shanghai A-Shares Index accelerated to its high near 6500. The break below 5000 broke the progression of rising lows. The index has given up 68% of its peak value, but found support near 2000 in the last month. However, a sustained move above 2400 is needed to signal that demand has regained the upper hand.