Brazil, Russia, lead BRIC charge
The MSCI BRIC Index has gained 7.9% in YTD 2016 until December 16. The gains have been due to the rise in Russian (RSX) and Brazilian (EWZ) equities while Chinese and Indian equities have dragged on the Index. What does the US rate hike in December 2016 mean for each of these countries going forward?
The impact of rate hike on Brazil
The US rate hike has come at a bad time for Brazil. Though Brazilian equities have had a fantastic run in 2016 due to hopes for a brighter economic future, some decisions taken by the Michel Temer government in that regard have sparked public protests. The latest such decision is the PEC 55 amendment, which puts a cap on government spending on public programs.
If the pace of rate hikes quickens in the US, it could result in a volatility spike in Brazilian equities. A strengthening dollar (UUP) would hurt Brazilian ADRs traded on US exchanges as well.
The impact of rate hike on Russia
Two things are going to impact Russian equities (ERUS) going forward: crude oil prices (USO) and President-elect Donald Trump’s stance on economic sanctions on Russia. If both these factors are in favor of the country, then even a quicker pace of rate hikes would be absorbed by Russian equities better than its emerging market peers.
This is not to say that Russian equities will not witness outflows, declines, or volatility if the US hikes rates at a quicker-than expected pace. This just means that with the aforementioned factors working in Russia’s favor, the impact of rate hikes in the US would not be as severe as it would be if crude oil prices take a fall or if Donald Trump does not remove economic sanctions imposed on Russia since February 2014.
In the next article, let’s look at the impact of a rate hike on the remaining two nations of the BRIC Group: India and China.