Fed hike may be last straw for beleaguered Bric

NOW that the People's Action Party is back with a resounding mandate in Singapore, it's time to refocus on the Fed's next move, the impact of a strong US dollar, the myth of Bric, and the potential for a major selloff in emerging market (EM) equity and currency markets.

Let's start with the macro picture framing Bric (Brazil, Russia, India, China) and other EMs. Growth in trade flows, once the staple of all EM economies, is now experiencing a net shrinkage. EMs that contributed 8 per cent to the growth of trade in 2010, now represent a net drag on trade growth, ie, EM trade flows as a percentage of global trade have actually shrunk 1.5 per cent in H1 2015. How does one explain this downdraft in trade despite depreciated EM currencies? The trouble is many of these economies are also import-dependent, which has made imports more expensive. Coupled with lower GDP growth globally, current account deficits have blown out in many economies, serving only to exacerbate the problem.

With pressure on EM currencies continuing abated, capital flight has intensified. China, Brazil and Russia have experienced capital flight of over US$200 billion in the last few months. At the same time, these countries are experiencing what is effectively "QT" or "quantitative tightening". As EM reserve managers look to defend their currencies, they are being forced to sell US Treasuries, which is exactly the opposite of QE or "quantitative easing".