Currency Challenges for the BRICs

June 28, 2012 | Neil S. Capps, CAIA, FDP, Director of Client Service, Managing Partner

Given the volatility of the global markets in recent years, foreign currencies have become a substantial factor to consider when investing in non-U.S. securities. The BRICs (Brazil, Russia, India, and China), generally known as the most influential emerging markets, are experiencing various situations that have had a negative effect on their respective currencies. Brazil has seen a resurgence in its consumer default rate as previous bad loans are manifesting themselves. Many analysts believe that this is similar to the recent subprime loan collapse in the United States, as the consumer debt default rate reached 7.6% in April. India is in danger of losing its investment grade rating due to trade and budget deficits. Russia’s main export of crude oil has suffered a 26% drop in price this quarter alone, driving investors to more stable nations. China has avoided the major drops that other currencies have versus the dollar, and the economic policies have thus far kept the currency value at a secure value, though it dropped over 1% in the second quarter. Furthermore, home prices fell in 54 of 70 cities tracked in China during the month of May. China has also reduced its annual growth target to 7.5% from 8.0% due to the slowing of demand for its exports as consumer demand in other nations has been sluggish.

The weakening currencies could present an opportunity for investors looking to enter emerging markets, as it may increase the competitiveness of the emerging markets countries affected, and hurt corporations based in developed countries with strong presence in the BRICs. For example, analysts believe the currency effect in Brazil will be a significant headwind this quarter for Coca-Cola Co., which has been investing heavily in South America and has experienced substantial growth in the region.