Taking Brazil and Indonesia Over China

Includes: EWZ, FXI, IDX
by: Bob Rubin
Good investing strategies never let you buy without knowing why. They also keep you in step with market trends. These truths become clear while reading “Second Thoughts On The Chinese Model?” by Walden Bello. His scathing reassessment of China’s economy, and appreciation of Brazil and Indonesia, reminds us that mere fashion should never be a reason to invest. Investors should follow the flow of capital and market trends in their search for opportunities.
According to Bello, China may no longer be able to grow as fast as it has, while Brazil and Indonesia are catching fire among investors and among companies expanding overseas operations. China’s problems are increasingly well known: A real estate bubble near bursting, inflation, industrial overcapacity, and halting development of its domestic consumer market. Now China has labor trouble. The government tolerated strikes against Honda (NYSE:HMC) and Toyota (NYSE:TM) last year, yet labor unrest is growing among the smaller Chinese companies that serve the export market that is the core of China’s economy.
China’s chief competitive advantage was cheap labor. That labor came from migrant workers who poured into industrial coastal cities from inland farm country. Their numbers kept wages low and protest difficult. This migration now is dwindling as China becomes a more urban nation. Without crowds of new migrants to replace them, workers are demanding better treatment.
China’s price advantage may be vanishing. Brazil and Indonesia rely on domestic consumption far more than China. They have grown their middle classes, building a market. Unlike China, Brazil and Indonesia accomplished their rises as democracies. They have political stability without the use of force.
Brazil combines policies friendly to foreign investment with the “Bolsa de Familia,” an anti-poverty program which reduced Brazil’s poor from 50 million to 30 million. Brazilian families get payments so long as they keep their children in school and give them regular health check-ups. Indonesia has also reduced poverty – creating a domestic market – while paying wages that are often lower than China’s.
We can use key ETFs to learn how the three economies performed as investing strategies. The iShares Trust FTSE China 25 Index Fund (NYSEARCA:FXI) rose about 5.6% in the last year. The iShares MSCI Brazil Index Fund (NYSEARCA:EWZ) rose about 9.3%, while the Market Vectors Indonesia Index ETF (NYSEARCA:IDX) rose about 31%.
The lessons for our investing strategies are clear: Follow market trends first, and estimate the survivability of those trends by watching economic fundamentals.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.