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Hard Hat Area: Falling BRICs

Still, the weak quarter doesn't mean the bull market is over

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At $2.022 trillion, Russian GDP has long surpassed the levels of 2008, while share prices are about half of their 2008 high despite solid profit growth. While such a discount might get even bigger because of rising global stock market correlations, it will prove an opportunity if/when the European situation is resolved. Russian-focused ETFs include the Market Vectors Russia ETF (NYSE:RSX) and the Market Vectors Russia Small-Cap ETF (NYSE:RSXJ); the latter is more focused on the Russian consumer, with a third less energy exposure.

The same way the Brazilian economy has slowed down from the first quarter of 2010, the Indian economy has slowed down every quarter during that period to go from year-over-year GDP growth of 9.4% to the present 5.3% annual rate.

11 Bulls the Analysts Haven’t Caught Yet
11 Bulls the Analysts Haven’t Caught Yet

India is very different from the other BRICs as it is the only major emerging market driven by domestic demand and not exports. The current account deficit has reached a record $189.4 billion, or 3.7% of GDP, and still widening in the fiscal year ended March. India does not have a lot of oil, and fast economic growth puts pressure on its trade balance and results in a problematic inflation rate of 7%.

The combination of the above factors has caused the Indian rupee to weaken sharply to 55.85 to the dollar, which is a lot weaker than the 2008 exchange rate low. (All emerging-market currencies tend to retrench at times of rising financial stress, so the present “less stressful” INRUSD weakness is telling.) The fact remains that India has GDP per capita that is only a fraction of the other BRICs, which long-term investors should view as an opportunity. The Market Vectors India Small-Cap ETF (NYSE:SCIF) has been “bombed out” to trade at 0.9 discount to book value, which is typical in selloffs as the average weighted market cap is less than $500 million.

Finally, the largest of the BRICs — China — is the most problematic from an index or ETF perspective, because of my long-held view that this is not a market that should be played broadly.

In China, many companies still are not being run for the benefits of shareholders — mandated lending quotas for banks come to mind near the top of the list. Forced lending does create the necessary aggregate demand, but it also creates higher losses that can spiral out of control in the normal economic ebb and flow. Right now, Chinese economic data shows deceleration, and banking stocks trade near record low book values because of the above dynamic.

This is why I would rather watch the developments from the sidelines in the largest of the BRIC economies. China is a stock-picker’s market, where the individual companies can be considered as investments based on their merits and not because of how they are directed by local CPC officials.

Ivan Martchev is a research consultant with institutional money manager Navellier & Associates. The opinions expressed are his own.  This is neither a recommendation to buy nor sell the stocks mentioned in this article. Investors should consult their financial adviser prior to making any decision to buy or sell the aforementioned securities.

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