Capital flight from the BRIC countries - Brazil, Russia, India and China - is sending their stocks, bonds and currencies down in tandem as the 10-year love affair with the largest emerging markets ends.
"Every decade, there's a theme that captures investors' imagination - the 1970s was about gold, 1980s was all about Japan and 1990s was about technology companies," Ruchir Sharma, the New York-based head of emerging markets at Morgan Stanley Investment Management said on Monday. "Last decade it was about the BRICs. That theme has basically run its course."
Investors have withdrawn US$13.9 billion from equity mutual funds invested in the four countries this year, or 27 per cent of the inflows since 2005, according to EPFR Global, a research firm. The MSCI BRIC Index fell 12 per cent last quarter while the nations' currencies fell an average of 4.1 per cent against the US dollar and their government bonds lost an average of 0.6 per cent.
Brazil's combination of rising inflation, weak economic growth and violent protests is driving away investors just as speculation of reduced Federal Reserve stimulus in the US spurs capital outflows from emerging markets worldwide. Russia's economy has slowed for five straight quarters as oil prices have dropped. India's current-account deficit has fuelled the rupee's decline to an all-time low.
China is headed for its weakest annual economic growth since 1990. While the MSCI BRIC index has returned about 227 per cent since Goldman Sachs Group's 2003 prediction that the countries would join the ranks of the world's biggest economies, the gauge is trailing the Standard & Poor's 500 Index this year by the most since 1998, the year Russia defaulted on domestic debt. Goldman Sachs ended its seven-month recommendation to buy stocks linked to the BRIC nations on July 1.
Jim O'Neill, the economist who coined the term BRIC in 2001, says the sell-off has made equity valuations in Brazil, Russia and China "very attractive".
The MSCI BRIC index's 17 per cent drop this year has dragged down the measure's valuation to 1.2 times net assets, a 36 per cent discount to the MSCI All-Country World Index.