The Problem With BRIC in 2008

Investing in a BRIC (Brazil, Russia, India, China) strategy may have paid off in 2007, but don't assume similar growth for 2008, warns John F. Wasik in a Bloomberg commentary today:

At first blush, the BRIC idea seems like a firm foundation for a growth portfolio. In the three months through Sept. 30, Brazil's gross domestic product expanded 5.7 percent; Russia at 7.6 percent; India at 8.9 percent; and China was up 11.5 percent.

...

The BRIC strategy was inspired by a paper published by Goldman Sachs Group Inc. in 2003. Titled ``Dreaming with BRICs: The Path to 2050,'' the report predicted that in less than 40 years, the combined economies of these high-growth countries would be larger than that of the top six nations today in U.S. dollar terms.

Wasik admits that the BRIC plan is appealing, but that it does increase your portfolio volatility. Neither can one assume that the four-way split is in itself a hedge:

A bubble bursting in China would hit world markets at the speed of light. China's CSI 300 Index, a basket of stocks on the Shanghai and Shenzhen exchanges, rose about 160 percent last year. Many analysts say it's ripe for a decline. Rapid growth often invites rampant stock-market speculation. Remember the Asian ``contagion'' crisis of 1997?

Could a BRIC ETF capture the pros without the cons? The Claymore/BNY BRIC ETF (EEB) posted a 67 percent rise in 2007, though Wasik adds a proviso: The fund is more BC than BRIC, as 80 percent is invested in just Brazil and China. Rather than increasing portfolio concentration, one should be seeking diversification. Wasik suggests:

A better vehicle for diversification is a fund that invests in Europe, Australia and the Far East, also known as EAFE. The iShares MSCI EAFE exchange-traded fund (EFA), for example, is a reasonable way of tapping global returns without loading up on any one country. While gaining less than 10 percent last year, it has outpaced the S&P 500 Index by 77 percentage points over the past half-decade.

As Wasik points out, the mix of mature economies in such an ETF provides much appreciated insulation for when some/all/any of the emerging economies turn sour. BRIC may have shown stellar performance recently, but the old adage still applies: Don't put all your eggs in the same BRIC basket.

Comments

[astralguide...:]

Question is not that BRIC will implode and will have serious downfall, but when. BRIC is not following the US markets as you see, which used to be the traditional case. However despite all US markets behaviour still does impact the world markets. Once the US institutionals bring some of the world market funds back to the US, which will happen sooner than later, it will strengthen the US markets and the talk of recession will fade away.
US markets will boom very shortly. We will write about the timing on our site soon and possibly share at seekingalpha.com

Now coming back to BRIC once the US markets turn back to bullish, BRIC will have some spectacular falls.

2008 Jan 07 05:48 PM

[Tom B:]

Enron, China-- same deal.

"US markets will boom very shortly. "

I assume you mean in a year, when we might get some adult supervision in Washington?

2008 Jan 08 10:38 AM

[astralguide...:]

Thomas. Right on Enron China.

Well Washington going haywire and real cause of current state of affairs obviously. This is like Mr Bean running the United states or even worse. In fact If Mr Bean was at helm we would have at least a good economy despite all gaffes.

Now despite Mr Bean running washington US markets will by pass the washingtonian corruption. Washingon is not the capital of the USA but Iraq currently. The moment the US market makers know that fact things can improve in hours. When in bad times, they say, the common sense, gets eclipsed by panic.

2008 Jan 08 12:34 PM

[p2pvoice:]

The author is warning us more about China than any other BRIC countries...may he should have entitled his article: "The Problem With China in 2008".

Some of us may remember the "Goldilocks" scenario in the US everyone talked about: Low inflation, low interest rates, high GDP...well some of the BRIC countries have that now.

2008 Jan 09 01:39 AM