Well, Chinese stocks must have finally bottomed out — earlier this month, we saw the launch of a new emerging-markets ETF that specifically excludes China, the EGShares Emerging Markets Core ex-China ETF (XCEM).
I say this mostly in jest, of course. Emerging Global Advisors is a solid ETF shop, and I’ve invested in their EGShares Emerging Markets Consumer ETF (ECON) for years.
But the kind of revulsion you see today towards Chinese stocks is pretty much exactly what you would expect near a market bottom.
Just months ago, Western investors salivated at the prospect of getting access to Chinese A-shares, and it seemed just a matter of time before MSCI (MSCI) included them in emerging-market benchmarks. But a market crash and a sad attempt by the Chinese government to prop it up a have made China — and by proxy, the rest of its brethren in the emerging-market BRIC space — investment pariahs.
Today, we’re going to take a look at the original four BRICs — Brazil, Russia, India and China — and see if there might be some value in the wreckage.
Investing in BRICs: Brazil
It’s ugly there. Or, given Wall Street’s love of acronyms and abbreviations, perhaps we should say it’s “chugly,” because a lot of Brazil’s woes are essentially contagion from fellow BRIC China.
As China’s economy cools and matures into more of a Western-style, consumption-based economy, China’s ravenous appetite for Brazil’s raw materials is easing along with it.
But the story gets worse than that, and Brazil is probably the most vulnerable of all the BRICs. The plunging value of the Brazilian real (and really, all emerging-market currencies) is helping to fuel inflation, as is the surge of social spending that President Dilma Rousseff unleashed to get re-elected last year. Brazil’s official inflation rate has risen to 9.5%, even as growth has actually turned negative. Brazilian GDP has failed to grow in four out of the last five quarters, and the country is in technical recession.
Add to this a political crisis that might still result in Dilma getting impeached or resigning, and it’s unsurprising that Brazilian stocks have suffered. But might they finally be cheap enough to warrant taking a risk?
The average Brazilian stock now trades at a price-to-earnings ratio of just 4.7. At that price, a lot of bad news is clearly already priced in.
I’m not going to go out on a limb and attempt to call a precise bottom, but I’ll say this: At current prices, it might make sense to start tiptoeing into Brazilian stocks.
Investing in BRICs: Russia
I’ll start with the good news: Russian President Vladimir Putin recently had a photo opportunity holding a cute, cuddly little kitten.
And that’s really all I have.
Among the BRIC countries, Russia’s situation is the bleakest. While Russia has an educated population with a surprisingly gritty work ethic, its economy is still highly dependent on natural resources. With the dollar near multiyear highs and the prices of most global commodities near multiyear lows, that’s bad news for Russia.
And it’s hard to see things getting better any time soon. Western sanctions following Russia’s Ukraine adventures certainly aren’t helping matters, and the steady erosion in the rule of law makes it exceptionally difficult to start or grow a legitimate business in Russia.
Really, the best Russia can hope for is a sudden reversal in the price of energy — and that’s certainly not out of the question. Crude oil prices may very well have found a bottom in the volatility of the past few weeks. Only time will tell.
On the valuation front, Russian stocks are almost always the cheapest among the BRIC countries, and they are certainly cheap today, trading at a P/E ratio of 7.4.
But be careful here. Russian stocks are probably better as a short-term trade than a long-term investment.
Investing in BRICs: India
India, until recently, was the bright spot among the BRICs.
As a service-driven economy, India has been less affected by falling commodity prices and the slowdown in China than the others. Indian GDP has continued to hum along at about 7%.
And at the same time, there was a lot of optimism following the election of Prime Minister Narendra Modi, who many consider to be India’s modern-day equivalent of Ronald Reagan or Margaret Thatcher: a no-nonsense reformer with the chutzpah and the determination to reshape the Indian economy.
Well, Mr. Modi might still end up being that transformative prime minister. But his work, like that of Thatcher and Reagan, will take years to see through to completion. And in the meantime, Mr. Market got a little ahead of himself.
As the realization has set in that Rome wasn’t built in a day, India’s market has sagged. The iShares MSCI India ETF (INDA) is down about 20% from its 52-week high.
Indian stocks are by no means cheap, trading at about 31 times earnings, so I wouldn’t be in a huge hurry to load up on shares just yet.
But if you believe in the India story, it makes sense to average into Indian stocks on dips.
Investing in BRICs: China
And finally, we get to that most problematic of the BRIC countries — China.
Chinese stocks have been in free fall for months, with A-shares losing more than 40% of their value.
The collapse in stock prices is not really a result of China’s slowing economic growth. In fact, you could argue that the market tumble is actually responsible for sagging growth, as the volatility has caused some of China’s captains of industry to rethink expansion plans.
No, China’s market meltdown has a lot more to do with the melt-up that preceded it. In the span of about seven months, China’s A-shares more than doubled in value, driven by speculation by “mom and pop” Chinese investors.
Now that the bubble has burst, is it time to buy?
Chinese A-shares are moderately cheap, trading at about 12 times forward earnings. But that’s not quite cheap enough to buy based on value alone.
Meanwhile, one of the biggest bullish arguments for Chinese A-shares has now effectively gone out the window.
It was widely believed that MSCI was planning to add China’s A-shares to its benchmark emerging market index, which would have meant a tidal wave of Western money pouring into the Chinese market. Well, following the market crash and China’s response to it — which has included massive restrictions on stock sales — that is off the table for right now.
So, while I might be comfortable nibbling on Chinese shares at current prices, I don’t exactly have a sense of urgency.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long ECON. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
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