Citigroup’s Big Bet on Emerging Markets Turns Sour [ANALYSIS]

When the US economy saw its worst economic meltdown since the Great Depression of the 1930s, it was widely believed and predicted that this would be a window of opportunity for emerging economies like China and India. These positive predictions lead to an inflow of investments in countries like Brazil, Russia, India, and China, as the BRICs saw a 25 percent boost in growth during 2008-2010.

 As 2011 ended, these major emerging economies started showing signs of weakness. India’s economy showed a less than expected threshold of growth in the first quarter of 2012. India generally suffers from the poverty , ineptitude of its current regime, a lack of solid exports, and it’s particularly affected by depressed government bond yields, high percentage of gross bad debts, plus restructured loans, and a slumping value of Indian Rupee.

Citigroup Inc. (NYSE:C) is among those who invested large stakes in emerging markets, and are apparently sticking to it. Back in early 2011, when other investors pulled about $21 billion out of developing economies, Citi invested more. CEO Vikram Pandit was the driving force behind the decision. The bank is heavily invested in markets like India, China, Mexico, and Brazil, among others. Citi earns two third of its revenues from developing economies in Latin America and Asia. The bank has increased lending in all of these countries, which has worsened its reputation among analysts, who see the debts as risk. Contrarily, some believe that Citi’s problems are still navigable, while bigger troubles are assailing central banks of Europe. Citi stock has lost more than 30 percent of their value over the past 12 months, and is today trading around $28.  As growth slows down in emerging economies, Citi’s fate also hangs in the balance.

In contrast to India, China’s growth is based around boosting exports, and it surfaced as the largest exporter of the world, beating out Germany, in 2010. As of July, sales of Chinese products in Europe have fallen 16.8 percent, while in the US, sales dropped by 0.6 percent. The export growth seen in the first half of 2012, is so far the worst since 2009. On the other hand, Economists and the IMF still expect China’s GDP to eclipse America’s by 2016-2018.  The slowed exports are only natural when the importers’ economies are distressed. Other Asian countries like, Singapore and Japan are also seeing declines in sales.

Citigroup Inc. (NYSE:C)’s surprise index, which analyzes how actual data differs from predictions and expectations, has been down 81 points  for the BRICs. Shares MSCI BRIC Index Fund  (NYSEARCA:BKF) is down 25 percent Since Vikram Pandits made his remarks in March 2011.  According to Bank of America Corp  (NYSE:BAC), Merrill Lynch , during the second quarter of CY2012, asset managers pulled their equity funds out of emerging markets and now have the least exposure in BRICs, since October 2011. The Indian Rupee, Russian Ruble, and Brazilian Real are among the worst currencies, in terms of valuation in June quarter, when compared to 25 others from emerging markets, according to Bloomberg.

It is naive to expect that BRICs, or any other emerging market, for that matter, can develop by leaps in the face a global slow down that has severely affected all the developed economies. The new world trade order necessitates a codependent financial system, in which one economy cannot flourish without the other. When big markets like the US and Eurozone are distressed, it stands to reason that countries like China, India, Russia, South Africa, Turkey, etc will suffer and struggle through the after effects. It is also not productive to jump to conclusions about emerging markets over quarterly results, just a couple of months ago the popular analysis was that Russia is only looking better, due to the high oil prices (Russia’s largest export), when in fact the actual industrial growth is pretty low. However the industrial growth of Russia expanded by 2.5 percent during July. Again this piece of good news may not be permanent, but neither are the bad tidings, the world economy is in a very fragile, yet, dynamic state in these times.

In the present dependent global economy, the rise of the BRICs or other emerging markets will have favorable impact on Western countries.  There is a consensus that China’s emergence as the top tier in superpowers can salvage the deteriorating state of world affairs, but the fate of the US and Europe’s economy is strongly linked to China’s growth, and until these matters don’t clear up, development will not sustain magically.

For detailed review of current economic troubles of BRICs, read:

Part I-Brazil’s Slowing Economy

Part II-Russia Feels the Heat from Lower Oil Prices

Part III-India’s Economic Miracle Over?

Part IV- China’s Economic Troubles