Collapse of the BRIC Trade 15 comments
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With the Brazilian real having its first monthly decline against the U.S. dollar since November, and BRIC (Brazil/Russia/India/China) markets all having a bad run -- the Shanghai Composite is off 34% this year -- I thought it timely to take a look at how the BRIC trade has been doing. Assuming you were long an equal-weighted portolio of the BRICs, and short the U.S. markets, here is how the two sides of the trade have done since 1/1/2006.
It is, to use the technical terms, doing horribly. The bottom fell out of the trade in early February, with the spread between the two indices converging, and now the BRIC countries' market performance have passed the U.S. on their way lower. Commodity currency countries are not a fun place to be right now.
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This article has 15 comments:
Shanghai is the neo "west country" of gold, that is why it is easy to understand everything going wild.
for example, last week, one apartment suit of 70 square meters was selling from 300K yuan more from its price of 1.3 million.
Welcome to China, where the people still have savings as well as hype inflation, while what many households from the American Land have is bank mortgage or loan to Master or Visa cards.
It is simply different.
Shows how the obvious will kill you
Do not own any shares but so many negative comments on home builders- a study in those learning about the market the hard way
Brazil: growth hasn't slowed nearly as much as everyone has hyped. ILF which is a high quality latin american etf has still held its ground just as other brazilian companies have. PBR for example is trading in a narrow range from its recent highs in the 120s.
Russia: This oil based economy has some more upside, though a heavily energy dependent economy. Perhaps the McDonalds in Moscow (which is the most expensive in the world) will have to raise its prices.
China: Had a recent bout with high inflation, but this is a one-time spike due to the storm. Its kind of like a company taking a major charge because their shipment was wiped out as the result of a storm. China still has a lot of upside and I think if the shares dip a little more, theres a trading range (FXI).
India: Paul, I agree with you here. After coming back from a recent trip to India, this is the one country that still hasn't decoupled from the US in a decent fashion. The city of Bangalore can pretty much state it all, massive amount of construction, US merchandise everywhere, and massive hype into exporting services, particularly IT to the US clients. Its not that many of the US firms have cut back on managed services from the clients (b/c its actually a narrowly changed figure), but the weak dollar has been massively eroding the Indian firm's currency advantage. It also seems that India's banking sector needs to have some major regulatory reforms since the major banks are carrying massive amounts of debt. Just waiting in line to withdraw money was experience enough to warrant reform!
So overall, BRIC isn't dead, but at a drop-point. I think that the Indian based ETF's will have a narrow range, even tick lower but eventually rise again. The Chinese market is in its bottom, or the beginning stages of a bottom. The olympics will not boost China completely. Remember, the last country to host the olympics spent a ton and pretty much got saddled with a ton of debt for years to come. Russia has some room to grow as they slowly modernize. MBT is a great play in this market. Brazil - has decoupled from the US, so the biggest reason why the ETF's related to Brazil or actually any of the ETF's mentioned have been performing poorly is b/c of market conditions.
The BRIC Countries are at two extremes, Brazil and Russia are major commodity exporters while China and India are commodity importers so thast they are just compromising each other in good order. China and , to a lesser extent, India do have large foreign exchange reserve ( pity most are still in USD or USD denominated assets) so that both of them have money to procure from Brazil as well as Russia and in return, Brazil and Russia pile up their export gain into foreign exchange reserve.
In the meantime, if we believe in the Commodity Super Cycle which , as Jim Rogers insists, begins by the turn of the millennium or the year of 2000 and would last at least ten to fifteen years, so that we are still in the middle of it. if that is true, we should NOT be afraid of any adjustment or consolidation in the commodity market though the commodity market is very very volatile and is subject to upheaval all the time. However, if we still believe in business cycle or fundamental economic cycle, we should start to worry about the market development in China which has experienced unprecendented growth for almost 30 years and there is growing indication that the China market is beginning to be harassed by stagnation, hyperinflation, as well as looming recession. Besides, the weak USD has trimmed its export growth whilst simultaneously it is now hard pressed to appreciate its Yuan which has given more impetus for its inflation to spiral upward. No one knows what would be the next stage of global economic development but it is evident that the U.S. should be in recession beginning the 1st quarter of this year whilst Europe would be stagnating and the China market would be bloated whilst Brazil and Russia would be simultaneously would have its growth slowed when their export of crude, metal as well as agricultural products would become sluggish given dwindling demand from China and India.
You will find that EEM even today is so much higher than the dot.com bubble represented by the NASDAQ when it was trading at 5,000. You will need to look at a chart that allows a 10 year comparison.
If you follow the trend lines down from the NASDAQ high to the bottom in 2003 and compare that with the trend lines of EEM and FXI (China), you will have a good understanding of what to expect... which is that the bottom could not possibly occur before the end of 2008 and a secondary bottom could be far beyond that when the full depth of the CMBS hit the fan, if past experience is any guide to the future.
afterall, look at China's global friends and allies: Iran, North Korea, Chavez's Venezuela, get the picture?
Hand off Tibet, Hands off Taiwan, Go to Hell PRC!
happy investing
It is dangerous to be in denial. China is making friends with with oil rich countries because they are looking 20, 40, 60 years down the road. That's fortitude.
In contrast, our corporate focus is quarter to quarter, at most 2 - 4 years. There is something to learn from the Chinese, given our current situation. That's short-sightedness.