Concerns for the BRIC - Brazil and Russia - Part 1
moneyrelations :: Jan.08.2008
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I recently received some great comments regarding investing in the BRIC countries (Brazil, Russia, India, China) so I thought I’d take the opportunity to investigate this further.
We’ve all seen the financial propaganda extolling the rapid development of the BRIC countries - huge population of middle class consumers, increasing GDP; commodities exporters like Brazil and Russia feeding the manufacturing and service giants of China and India.
No doubt about it, my emerging market funds and ETFs have been hot.
I was thinking of investing more money in the BRIC but then I thought it over. I do have a black belt in shopping and they are looking expensive. Furthermore, the BRIC might not be providing the greatest value in terms of risks/rewards.
Adding to my ire, when everyone starts talking about it, my “Team BRIC” t-shirt suddenly doesn’t look so cool anymore.
But not withstanding my fickleness, what exactly are these risks everyone talks about?
Today begins my three-part series introducing BRIC investment concerns. It’s food for thought if you “want to go there” to continue your own research.
B is for Brazil.
Investors are bullish on Brazil and with good reason. The country is slowly advancing in its economic reforms and paying down debt; interest rates have come down from recent years. Oh, and it doesn’t hurt that all this is supported by a commodities boom from a resource rich country.
However, when consumers get extra spending money, inflation rises which normally triggers interest rate hikes to slow down economic growth. Brazil is looking at interest rates of 11.25% but this is nothing like the 19.75% they saw in 2005.
So, concerns for Brazil include slow economic reform and a possible slowdown of growth with hyperinflation.
R is for Russia.
In my comments section, Brian Cole provided an English article from the Russian website, The Exile. The article by Yasha Levine focuses on the consumer credit bubble that Russia is facing.
In 2004, Russia’s total consumer loans amounted to about $20 billion. Two years later, that number quadrupled, or more. At the end of 2006, consumer debt hovered just below the $80 billion mark (about 8% of Russia’s GDP), according to Alfa Bank. If you listen to Russia’s Central Bank (CBR), the number was closer $100 billion.
The banking system is vulnerable giving easy credit with nose-bleeding interest rates. And most can’t repay with one third of debtors defaulting on loans.
The Central Bank of Russia and the government are beginning to put the reins on this but what happens if it is too late and the commodities boom takes a bad turn?
Concerns for Russia: Consumer credit and liquidity concerns should the house of cards tumble.
Tomorrow, I’ll do a quick check on what is ailing the IC-y countries, India and China.
Investing ::
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A large part of the allure of BRIC countries is the demographics. North America and Europe and Japan are very quickly ageing with low birth rates and recent backlash to immigration in some western countries will do nothing to help their long term economic potential. Countries like China, India and Brazil have young demographic which is at or very quickly reaching its most productive years. Couple this with ongoing economic reforms and you have a great formula for economic success
I reserve my judgment on Russia though. It is true that there are pockets of opportunity and many have become fabulously wealthy but the country risk is too high and unless you know your way around and have friends in high places, generating great wealth in Russia is going to be difficult. Besides, didn’t the average life expectancy in Russia drop like 10-20 years since perestroika?
Of the BIC countries, the Chinese stocks are beyond the bubble territory and mainly due to the structure of the stock market there. If China ever decides to open up its stock market completely, then the over inflated stock prices will surely come down
Indian stocks are also very expensive today and it is possible that some of the companies are able to maintain sufficient growth to justify these prices. There may still be some cheap stocks that one can buy in India but you have to look really deep to find these. I have highlighted one of these stocks on my blog: http://arohanvalue.blogspot.com/search/label/SLT
Brazil valuation looks the most reasonable of the BRICs and I am still kicking myself for not pulling the trigger on the few companies I was looking at a few years ago.
Nice topical article.
It is interesting to note, that 2-3 years ago, For every 1 US Dollar, you would get close to 4.00 Reals. Now for every 1 US Dollar, you get 1.75 Reals.
Reals is the Brazilian currency offcourse.
@ Arohan
Interesting comment about the backlash against immigration. I mean, I don’t think xenophobia is specific to this generation. Would be interesting to see if there’s a study on this…
I totally concur about Brazil. Frankly, it’s the only one of the 4 I’d touch now.
@ Jean Costa
And guess what Buffett has been buying…
Thanks for dropping by, guys!