BR IC :The Oil Effect

The fall in crude oil prices has been the trigger for a bounce in the markets. The UBS Bloomberg Constant Maturity Commodity Index is down 8.5% from the heights it reached on 3 July. The worry that slowing global growth will soon send commodity prices down has led to an about-turn in the behaviour of the so-called Bric (Brazil, Russia, India and China) markets.Till June this year, it was the Brazilian and Russian markets that were doing relatively well. For instance, in the three months to 30 June, the MSCI Russia index was up 9.7% and Brazil up 7%, while MSCI China was down 4.5% and India down a huge 14.23%. Now, consider what has happened this month: The MSCI China index is up 0.02%, while the other three have fallen—India by a small 0.42%, Russia by 9.41% and Brazil by 11.04%. The reason for the diverging performances is simple—Brazil and Russia are commodity producers and exporters, while India and China are net commodity importers. Any fall in commodity, especially in energy, prices is negative for the BR part of Bric and good for the IC part.The big question, of course, is whether oil prices are headed downwards. The experts don’t seem to believe so, with the International Monetary Fund’s, or IMF’s, World Economic Outlook Update, issued last week, pointing out that “oil and food prices are likely to remain high and volatile, with the baseline forecast showing only moderate declines…” If IMF is right, the bounce in Indian and Chinese stocks is likely to be temporary.