How The BRICs Came Down to Earth

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

The popularity of the acronym “BRICs” — which stands for the fast-growth economies of Brazil, Russia, India and China — spread like wildfire in the post-financial-crisis world.

Coined by ex-Goldman Sachs economist Jim O’Neill in 2003, the BRICs came to symbolize the shift in global economic power away from the developed G7 economies and toward the developing world.

Not so long ago, the rise of the BRICs seemed inevitable.

After all, together, the BRICs encompass more than 25% of the world’s land mass and 40% of the world’s population. And the combined Gross Domestic Product (GDP) of the BRICs exceeds that of the United States.

And if you adjust for Purchasing Power Parity, together the BRICs already account for 52% of the planet’s GDP.

In 2010, Standard Chartered Bank predicted China would overtake the United States to become the world’s largest economy by 2020. And China’s economy would be twice as large as the United States’ by 2030 and account for 24% of global GDP. U.S. jobs were migrating to Indian outsourcers. Brazil was finally set to take its place among the world’s great economic powers, with its economy having overtaken the United Kingdom’s in size.

No wonder that investors poured money into the BRIC stock markets in the expectation that their profits would echo the rise to global prominence of these newly dominant economies.

Alas, things did not quite turn out that way.

BRIC Investing Gone Bust

After the financial meltdown of 2008, many investors favored BRICs over stagnant, old-world economies like the United States.

Yet things turned out differently.

Even as U.S. markets still trade within striking distance of their all-time highs, the MSCI BRIC Index now languishes 48% below its 2007 peak.

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No wonder BRIC investors are pulling in their horns.

Below is a quick look at how BRIC investors in the United States have fared in the recent market turmoil.

I. China – Deutsche X-trackers Harvest CSI300 CHN A (ASHR)

The Chinese stock market has been in the headlines often of late, collapsing pretty much as I had predicted in early June.

The latest news is that the Chinese government has thrown in the towel on supporting the stock market in a $200 billion spending spree funded by the central bank, local brokerages and commercial banks. Attention has shifted to Chinese journalists, who now are “confessing” to writing stories that stoke panic in the markets.

In the meantime, bad loans at China’s banks have soared, with ICBC’s book of bad loans soaring by 28% last quarter alone. And the banking sector is often the canary in the coal mine about more bad things to come.

In any case, the “this time it’s different” conviction that seemed to undergird China’s dominance in the world has waned along with the size of investors’ portfolios in the Chinese markets.

Deutsche X-trackers Harvest CSI300 CHN A (ASHR) has fallen 35.88% over the past three months.

ashr_0901

II. Brazil – iShares MSCI Brazil Capped (EWZ)

The knock-on effects of the Chinese slowdown are particularly evident in Brazil, as its commodity bet on China has turned sour. Brazil’s exports to China tumbled by an astonishing 19% in the first seven months of this year. Economic growth in Q2 came in worse than expected at minus 1.9%. Put another way, on an annual basis, Brazil’s economy contracted by a whopping 7.2%. Inflation is nudging double digits. The government is cutting back spending, exacerbating the contraction. Wealthy Brazilians are abandoning ship, snapping up properties in southern Florida.

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As one commentator put it in the Wall Street Journal, “Brazil mania has turned to Brazil nausea.”

iShares MSCI Brazil Capped (EWZ) has fallen 21.46% over the past three months.

ewz_0901

III. Russia – Market Vectors Russia ETF (RSX)

Senator John McCain once dismissed Russia as “a gas station with a country attached.” Over the past 18 months, Russia has been hammered by the oil price and the costs of its increasing economic isolation and political adventurism.

At the same time, Russia is a value investor’s dream: it is both hated and cheap.

In fact, Russia is the second-cheapest market in the world on a long-term Cyclically Adjusted Price Earnings (“CAPE”) basis.

Trading at a price-to-earnings (P/E) ratio of about 4.8, and a price-to-book ratio of 0.7, the Russian market trades at about half of the level of the broader MSCI Emerging Markets Index. Gazprom, the world’s largest natural gas producer, trades at a P/E ratio of 5.

Here’s the biggest surprise. Despite the pullback in recent months, Russia is up 14.97% for 2015. That makes it the third-best-performing market of 2015 among the 47 markets I track at my firm, Global Guru Capital. NOTE: Global Guru Capital is a Securities and Exchange Commission-registered investment adviser and is not affiliated with Eagle Financial Publications.

Market Vectors Russia ETF (RSX) has fallen 11.24% in the past three months.

rsx_0901

IV. India – WisdomTree India Earnings ETF (EPI)

India has long suffered in the shadow of China. No wonder Indian officials are working hard not to gloat at the Chinese economy’s well-publicized stumbles.

That’s largely because India’s GDP growth forecast for 2015 of 7.7% exceeds China’s estimated 6.9%. And that’s assuming you accept China’s seriously fuzzy economic statistics.

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That said, critics are equally suspect of India’s projections, which seem too good to be true. Most worrisome is that Prime Minister Modi’s reforms have bogged down in parliament, as investment in industry and infrastructure has ground to a halt.

WisdomTree India Earnings ETF (EPI) has fallen 11.29% over the past three months.

epi_0901

No ‘Cheery Consensus’

For all the hoopla surrounding the BRICs, this highly fêted group has turned out to be a bust for investors making a one-way bet.

Meanwhile, growth in emerging markets is only slowing. Projected growth of 3.6% in emerging markets in 2015 is the lowest since 2001, excluding the crisis year of 2009.

And if China’s growth is actually 4%, and not 6.9%, that emerging markets growth number withers to 2.7%.

About the only thing that the BRICs have going for them is that they have become among the most hated markets on Earth.

And as Warren Buffett has noted, “markets pay dearly for a cheery consensus.”

Certainly, the current sentiment surrounding the BRICs is anything but cheery.

In case you missed it, I encourage you to read my e-letter column from last week about why it might be a good time to invest. I also invite you to comment in the space provided below my commentary.

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