Invest in BIC, Not BRIC

Below is a chart of the BIC index that we have created in order to track its progress. It is an equal weight of Brazil, India and China (Hong Kong) markets. We have been investing using the iShares ETFs for portfolios as these represent a good way to gain exposure to these particular emerging markets and their corresponding oil and commodities.

Traditionally, you hear of the BRIC which includes Russia of course. But, it is difficult to invest in a country that turns off and on its stock market like water (or vodka in this case).

• FXI - iShares FTSE/Xinhua China 25 Index (ETF) (NYSE)
• EWZ - iShares MSCI Brazil Index (ETF) (NYSE)
• EPI - WisdomTree India Earnings Fund (ETF) (NYSE)

We have been investors since early March as we believe that there may be more room to grow as these economies are on the fast track to recovery as they are much more able to be flexible and nimble to react to changing market conditions. In addition, the sheer number of citizens makes for one heck of a consumption machine. At the same time we realize that there will be massive trading opportunities that will form moving forward. In fact, while many feel that these countries are now well insulated from market problems as they have seen their lows, we are not quite sure that is an accurate assumption.

On the other hand (as always), it is reasonable to expect that there will be significant resistance coming as the world demand needs to keep these three in business. Apparently, China can go at it alone as their population consumes native goods along with added stimulus from government spending stockpiled reserves. India and Brazil are more fragile however.

Brazil in particular needs to figure out how to profit in a world of sub-$50 oil. The Petrobras (PBR) deep water oil find will be enough to create enormous wealth for the entire population, but there are significant challenges to actually bringing that oil to the surface. The cost of the process requires that oil stays north of an estimated $50 or so in order to ensure that it is worthwhile. It is that simple.

India is the weakest link of the three. Service is a significant export and while the population can consume, the country is very dependent on external demand for its growth. Some economists see it as the next China/Asia play but the political environment and a country that remains very poor will have its challenges without any tangible commodity exports.

Comments

[hownow:]

India weakest link?

India is the strongest link and the ONLY vowel !

indiaplay.blogspot.com

No BRIC, no BIC without "I" ndia

Apr 22 08:59 AM

[Dustinian:]

I really feel that Russia should not be ignored. I have a Jan '11 call option out on RSX market vectors because I can remember all too clearly the strength of the Russian economy in years past. Obviously their economy relies on the recovery of energy prices, but it isn't as if that will not happen. It will.

Apr 22 10:14 AM

[HaavBline:]

Agree with Dustinian. All of them are 'emerging markets' for a reason. The markets are not as liquid. The financial systems are not as rubust and mature. From time to time crisis will hit and the whole system will seem wobbly.

It especailly does not make sense AFTER Russia dropped 80% or so to drop it. After all, Russia holds some 33% of world natural gas reserves and some 13% of oil reserves. RSX could be a more volatile element in the BRIC index, but that has always been a known factor.

Apr 22 12:10 PM

[john redmond:]

It does make sense to drop Russia because it is a country where capital operates without the protection of law. The gang of Thugs who run the place could take your money at a moments notice and nothing could be done.

Apr 22 04:16 PM

[Seth Freeman:]

India is not dependent upon external demand for its growth. That is a fallacy. India is the largest English speaking democracy with a tradition of capital formation and the least dependent of any of the BRICs on exports and commodities; with a middle-class almost as large as the entire U.S. population. Half of India's 1+bn population is under 25 and haven't started spending, yet. No banks or insurance companies failing there. Meanwhile, China's aging population under the one-child rule is beginning to look like Western Europe's. And, China's politburo can change the rules whenever it wants to.

The second fallacy is Investing in India and China using ETF's. ETF's are a fake way to gain India and China country exposure. Why? The whole concept of an ETF is for the single ETF share to represent the basket of underlying stocks. However, both the China and India stock markets are long closed when the U.S. India and China ETFs are trading. Intraday China and India ETF prices reflect U.S. market sentiment and highly sophisticated trading by hedge funds and institutional investors using ETFs.

Apr 22 04:30 PM

[Eric Peterson:]

Seth: I don't understand your comment about ETF's. "Investing" is not day-trading. So it doesn't matter if the ETF's trade during hours that the Indian and Chinese markets are closed. If India and China rally 10% in a month, I guarantee you the ETF's will also rally. It's irrelevant that they trade at different hours.

Apr 22 04:46 PM

[Seth Freeman:]

I agree that its likely both the local markets and the ETF's would rise. However, Investors (whether or not they are day-traders or mid or long term investors) are buying and selling India and China ETFs at prices that are de-coupled from the closing prices of the underlying portfolio. Recently, U.S. India ETF's and India ADRs have been highly sentiment driven based upon volatile U.S. market sentiment not just local market dynamics and fundamentals. ETF Investor returns (without regard to day-traders) are impacted by entry and exit prices that are de-coupled from the local market during U.S. hours. Its my admittedly self-serving belief that the best way to be an Investor in these markets is by buying into a basket of local shares with a portfolio-level NAV that reflects the value of the local shares' closing prices, not the price paid between buyers and sellers after (or before) the local markets are open.


On Apr 22 04:46 PM Eric Peterson wrote:

> Seth: I don't understand your comment about ETF's. "Investing" is
> not day-trading. So it doesn't matter if the ETF's trade during hours
> that the Indian and Chinese markets are closed. If India and China
> rally 10% in a month, I guarantee you the ETF's will also rally.
> It's irrelevant that they trade at different hours.

Apr 22 05:37 PM

[Joseph Sherman:]

You write that it is "...difficult to invest in a country that turns off and on its stock market like water...: The stock market is only source of activity. Perhaps you should try to understand how Russia really works rather than use only one parameter.

Apr 23 12:19 AM

[dtblount:]

I agree with everyone's criticism on your views regarding Russia.

While the RUB has taken a beating and the government has closed trading several times lately, it still provides amazing opportunity. With respect to your own argument, how is it any better than China??? China's currency is pegged/manipulated (depending on who is analyzing it), and the gov't has an even tighter grip on the economy and market than does Russia's. Granted, the Chinese have not exhibited such control lately, but the risk is still very much there. You could argue that Brazil is the weakest because Lula doesn't really have a formal education...or that India is the weakest because they suffer from a plethora of red tape from the British Colonial era. Your one line argument seeking to discount Russia is hardly sufficient. I am incredibly bullish of China...as well as India, Brazil, Russia, and a host of other EMs and FMs.

A country as rich in natural resources as Russia (crude, natty, platinum, palladium, gold, fresh water, grains, etc, etc) - not to mention a pretty decent military with regional diplomatic influence and FX reserves should absolutely be considered for investment. They could be self-sufficient if need be - plus, they have an energy stranglehold on Europe. Yes, there are risks...but I feel the rewards far outweigh these.

Instead of removing any one of the BRICs, I'd focus my time and efforts on figuring out who should be added.

Apr 23 03:45 PM

[HaavBline:]

I am glad you admit that your comment is self serving. Buying baskets of local shares does not make sense for most individual investors. The transaction cost are very high and the liquidity is very poor. The local market are often even more volatile and pricier. Not only are local markets are every bit as subject to market emotions as US markets. There are higher risks of market manipulation.


On Apr 22 05:37 PM Seth Freeman wrote:

> I agree that its likely both the local markets and the ETF's would
> rise. However, Investors (whether or not they are day-traders or
> mid or long term investors) are buying and selling India and China
> ETFs at prices that are de-coupled from the closing prices of the
> underlying portfolio. Recently, U.S. India ETF's and India ADRs have
> been highly sentiment driven based upon volatile U.S. market sentiment
> not just local market dynamics and fundamentals. ETF Investor returns
> (without regard to day-traders) are impacted by entry and exit prices
> that are de-coupled from the local market during U.S. hours. Its
> my admittedly self-serving belief that the best way to be an Investor
> in these markets is by buying into a basket of local shares with
> a portfolio-level NAV that reflects the value of the local shares'
> closing prices, not the price paid between buyers and sellers after
> (or before) the local markets are open.

Apr 24 01:48 AM

[bluemoo6:]

Would a BICA (Brazil, India, China Australia) strategy make sense? Replace Russia with Australia, which also has natural resources and commodities, and a lot more stable than Russia.

May 07 12:04 AM

[cart:]

I appreciate the concern which is been rose. The things need to be sorted out because it’s not about the individual but it can be with everyone.
cart456

real estate

May 21 05:53 AM

[cart:]

I appreciate the concern which is been rose. The things need to be sorted out because it’s not about the individual but it can be with everyone.
cart456

real estate

May 21 05:55 AM