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The Hopeless Reductiveness of the BRICs

They have little in common other than their huge long-term potential

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The Brazilian economy has decelerated to a near-crawl of 0.5% GDP annualized growth in the latest quarter, partially due to consumer spending fatigue and partially due to the slowdown in China and the situation in Europe.

This has caused the central bank to cut the policy SELIC rate to a record low of 7.5%, while the inflation rate is not at a low for the new “hard” version of the Brazilian currency, the reais. This has pressured the Brazilian currency somewhat because the country no longer enjoys the record adjusted-for-inflation interest rates that made the reais such a standout performer.

BP Makes Another Bargain-Basement Sell-Off
BP Makes Another Bargain-Basement Sell-Off

Brazilian consumer and corporate loan rates (which are multiples higher than the SELIC policy rate) are near a record low — consumer loans at 35.6% and corporate loans at 23.1% — while default rates are elevated at a three-year high. The consumer default rate in August was 7.9%, while the corporate loan default rate rose to 4.1% from 4% a month ago.

This looks like a situation where consumer spending fatigue is ongoing, and that may keep pressuring Brazilian banks, which trade at depressed book value multiples compared with a couple of years ago, despite the obvious fat interest rate margins.

Major financials like Itau Unibanco (NYSE:ITUB), Banco Bradesco (NYSE:BBD) and Banco Santander (Brazil) (NYSE:BSBR) trade at price/book multiples of 2, 1.8 and 0.9, respectively.


I believe India holds the most BRIC promise because it’s least developed on a GDP per capita basis and is the least exposed to shocks from developed markets. It’s also somewhat shielded from a potential shock from the bigger-than-anticipated slowdown in China, which is already affecting both Brazil and Russia via pressure on some commodity prices.

Not too many Indian ADRs are available for individual investors, but for long-term investors, the elevated valuation gap between small caps (cheap) and large caps (expensive) looks interesting. Indian small-caps investable via the Market Vectors India Small Cap Index ETF (NYSE:SCIF) trade at a fraction of the P/E and price/book multiple of Indian large caps, investable via the iShares India Nifty 50 Index Fund (NASDAQ:INDY).

Ivan Martchev is a research consultant with institutional money manager Navellier & Associates. The opinions expressed are his own. Navellier & Associates holds positions in Itau Unibanco for its clients. 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. Investing in non-U.S. securities including ADRs involves significant risks, such as fluctuation of exchange rates, that may have adverse effects on the value of the security. Securities of some foreign companies may be less liquid and prices more volatile. Information regarding securities of non-U.S. issuers may be limited.

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