The Global Bull Bets on the BRICs

Nicholas Vardy

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

With the G-20 agreeing to increase the role of the IMF by tripling its funding to $750 billion, Soros got his wish. It has also confirmed an already increasing risk appetite for emerging market assets. This week’s Global Bull Market Alert pick, iShares MSCI BRIC Index ETF (BKF), bets on that shift in sentiment — particularly with respect to the BRIC economies of Brazil, Russia, India and China.

Here’s why I think investing in the stock markets of the BRIC countries is a solid risk-reward trade, assuming improving economic sentiment holds.

First, doom and gloom headlines notwithstanding, the stock markets of emerging markets have outperformed the S&P 500 by almost 15% just this year.

And unlike the S&P 500, emerging markets hit bottom on Nov. 20 — avoiding the S&P 500’s second serious dip in early March. The four BRIC stock markets are doing even better, with all of them up double digits year to date. That’s a sign that global investors are beginning to take more risk — a bullish sign for stock markets to improve further.

Second, BRIC economies, particularly Brazil and Russia, are commodity-based economies. Again, assuming the economic news continues to improve, commodities are set for a strong recovery after last year’s collapse. On the economic front, China’s economy is also likely to be among the first to recover among the global economies, lending further support to its rising stock market.

Third, valuations in the BRIC markets are compelling. Brazil is trading at a P/E of 7.31, Russia at a P/E of 2.33, India at 9.04, and China at 9.52. There are Russian companies trading at a P/E of 1 (!). The irony is that most investors are more likely to buy these high-risk markets when they are trading at a P/E of 25 than at today’s depressed levels. Recall that China was trading at a P/E of over 60 only 18 months ago.

So buy the iShares MSCI BRIC Index ETF (BKF) and place your stop at $21.25. BKF has 124 stocks, with the top 10 making up 36% of the ETF. The country weightings are China, 36%; Brazil, 28%; Russia, 20%; and India, 16%.

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Portfolio Update

The Market Vectors Double Short Euro ETN (DRR) fell this week, as the euro strengthened on the back of the news that the IMF will be given resources to bail out the weaker eurozone and Eastern European countries. Until the long-term implications of this move become clearer, I am temporarily moving DRR to a HOLD.

The CurrencyShares British Pound Sterling Trust (FXB) rallied strongly this past week. With the housing market showing the first signs of life in many months, green shoots of economic recovery are starting to show in the United Kingdom. I am moving your short position in the FXB to a HOLD and the dividend-adjusted stop price to $150.45.

Your bets on gold through the SPDR Gold Shares ETF (GLD) and the PowerShares DB Gold Double Long ETN (DGP) dropped last week as demand for safe-haven assets ebbed. I am moving both of these positions to a HOLD for now.

Your position in the iShares iBoxx $ High Yield Corporate Bond (HYG) broke the $70 level again on Friday. You will also receive a dividend payment of 80.6 cents per share, payable on April 7, for shareholders of record on April 3. HYG remains a BUY and your new dividend-adjusted stop price is $60.62.

The iPath DJ AIG Copper TR Sub-Idx ETN (JJC) jumped a solid 8% last week, as prospects for a global economic recovery brightened. Copper remains a BUY.

Your Rydex Inverse Government Long Bond Strategy Inverse (RYJUX) strengthened this week, as investors shifted funds out of “risk free” government bonds into riskier asset classes. The threat of inflation from ballooning government debts and money supply is also bullish for this position. RJYUX remains a BUY.

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