Global Investing, BRIC by BRIC

If you’re a global investor looking for global profits - including one potential way to double your money - you need to "Hit the BRICs."
Back in 2003, the Goldman Sachs Group Inc. (GS) - eager to push its clients toward emerging markets investment - created the acronym "BRIC" to stand for Brazil, Russia, India and China, the four emerging markets the investment bank’s strategists believed would become a dominant part of the world economy in the years ahead.

What started as a marketing ploy is now a profit play that global investors have to consider, since at least three of the four countries  - Brazil, China and India - feature sound economies with powerful growth rates, and stock markets with reasonable valuations.

In fact, China and India are two of the fastest-growing investable economies on the planet, and have been transformed into global leaders in both the manufacturing and service sectors. At the same time, Brazil and Russia each has become a cornucopia of commodities, and are emerging as global leaders in the white-hot global energy sector.

These new-found global strengths have provided all four of these countries access to massive amounts of capital, a key element of the investing methodology in both Money Morning and The Money Map Report.

With foreign reserves of $1.68 trillion, China basically has all the capital it needs for the development projects it has on the drawing board. India has nearly $300 billion in foreign capital invested in its stock market; and that virtually guarantees it will remain on global investors’ radar screens for the foreseeable future.

After conducting this analysis, we decided to develop "The BRIC Report," a periodic feature we’ll use to update you on both the latest developments, and the latest profit plays, in each of the BRIC economies and BRIC stock markets.

Building Profits, BRIC by BRIC

While the BRIC countries are by no means the world’s only attractive emerging markets - from time to time, in fact, the BRIC markets may become overpriced or their growth prospects may ebb - over the long haul, these markets remain strong opportunities for investors, and should remain at the top of your list of profit plays. Here are the four top factors why this is true.

• Population: The four BRIC markets are the largest economies and have some of the largest populations among emerging-market countries (which don’t include such already-emerged East Asian markets as Japan and South Korea). Companies from BRIC countries have large and competitive domestic markets, meaning they’re already globally competitive when they venture abroad.

• Rapid Growth: China and India have two of the fastest growth rates in the world, and that looks likely to continue. Other rapidly growing countries are much smaller - and more risky.

• Natural Resources: While China and India are the major poles of global manufacturing and service growth, the two other BRICs - Brazil and Russia - are cornucopia of commodities and energy, which in the past have been inadequately exploited. The escalating energy and commodity prices of the last five years have brought rapid growth to both countries, enabling them to develop active consumer sectors with a multitude of investable companies.

• Access to Capital: Brazil recently achieved an investment grade debt rating from Standard and Poor’s Inc., giving the Latin American country access to the major global pools of institutional capital, while also significantly lowering the cost of its debt. Russia has built up foreign-exchange reserves of more than $400 billion, allowing it to break free of a reliance on foreign capital. China, with a record $1.68 trillion of foreign exchange reserves, has access to all the capital it can handle. Finally, India may finally have broken out of the cycle of foreign exchange constraints that had previously prevented rapid growth: With foreign capital of almost $300 billion invested in its stock market, it is very much on investors’ radar screens worldwide.

Let’s take a look at the markets one at a time.

Bullish on Brazil

Having had its debt rating raised, Brazil is in the same position as an individual who gets a new job, pays off some debt and discovers the credit card companies suddenly all love him. It’s a heady position, and highly profitable for Brazilian companies, provided the government doesn’t go on a spending binge.

When Brazil was included in the "BRIC" group in 2003, it didn’t deserve the distinction. Long-term growth since the 1970s had averaged less than 2% annually per capita, and the country had narrowly avoided bankruptcy in 2002. Long-term interest rates were above 20% - around 15% in real terms - which hardly encouraged companies to make capital spending commitments that could provide a badly needed boost to Brazil’s flagging economy. Most alarming, a left wing socialist named Luis Inacio "Lula" da Silva had just been elected president.

Brazil got lucky. First, President Lula proved to be surprisingly moderate, perfectly willing to welcome foreign investment and not at all like his socialist neighbor, Venezuelan President Hugo Chavez. Probably more important, it was in 2003 that energy and commodity prices began the long climb that has brought them to their current astronomical levels. Since Brazil was not an oil exporter, there was no one single source of new wealth that the government could seize. Instead, revenue flowed to mining companies, the oil company Petroleo Brasileiro SA (usually referred to as just Petrobras) (PBR) and numerous agri-business operations.

Most startlingly, Brazil’s ethanol program, which had been a hopeless boondoggle for a generation since it started during the oil crisis of 1979-82, suddenly became the envy of the world. Rising oil prices made Brazilian sugarcane the world’s cheapest and most economically and ecologically efficient source of newly fashionable ethanol. Back when oil was trading at $20 per barrel, the ethanol-from-sugar program was a typical example of misguided Third World government planning. But now that oil’s pushing $130 a barrel, it’s a bonanza.

Brazil’s current growth rate is around 5% - but the Brazil of today is far more balanced and stable than in its 1970s version, even though growth back then was an impressive 10%. Brazil’s improving credit position is likely to allow today’s growth rate to persist. Besides, political risk appears minimal: When President Lula leaves office, a politician of the center-right could well replace him.

Another good sign for Brazil - there are more than 30 Brazilian companies with full American Depository Receipt [ADR] listings on the New York Stock Exchange, plus 40 or even 50 more traded on the over-the-counter market.  Here are a few of the more-attractive examples you might want to consider:

• Companhia Vale do Rio Doce, now referred to as Vale (RIO), is a huge iron-ore company with ancillary operations in gold, nickel, copper and other metals. At 10 times earnings, it is reasonably valued, though its dividend is only 1.6%.
• The afore-mentioned Petrobras, which is one of the few emerging-market oil companies with access to modern technology and a willingness to work with the oil majors. But there are several negatives. First, even with a recent sell-off, the company’s shares are up substantially in the past year. The stock’s Price/Earnings ratio is a somewhat-steep 16, while its dividend yield is a modest 1.6%. But there is a possible upside here, should it find another gigantic offshore oilfield. The downside case: Oil drops back to $50 a barrel.
• Companhia de Saneamento Basico, or Sabesp (SBS), operates the water-and-sewage system for Brazil’s Sao Paulo region. Now that’s a growth business, and one that’s not dependent on commodity prices. It has a P/E ratio of only 8.6. 

Reticent About Russia

As long as world oil prices keep increasing, or at least remain high, Russian energy companies will keep generating record profits. If that happens, count on Russian consumers to keep enjoying the resultant bonanza, thanks to spin-off benefits that will boost consumer-sector profits (leading to the creation of products that consumers actually can buy). However, Russia is the least sound of the BRIC economies, and is the one that I would least like to be invested in over the long term.

Politically, Russia has pretty much reverted to the pre-1991 Soviet system.

Today, just like then, there’s only one real party: The United Russia party, which controls 315 of the 450 seats in the Duma (essentially the lower house of parliament) and whose leader is one Vladimir Vladimirovich Putin. There is considerable censorship of the media, and dissident reporters and editors have a habit of disappearing - not that there are many left now. There is huge emphasis on military power, and on throwing Russia’s weight around in foreign policy.

There is, however, a significant economic difference from the pre-1991 Soviet Union: While the state still controls most property, it does not control all of it as before.

Another difference: Before 1991, Politburo members were relatively impoverished and notorious for their lack of fashion sense and trademark baggy Soviet suits; these days the top brass, and especially Putin, are telegenic, snappy dressers with broad wardrobes of Italian clothes - and hefty bank accounts to match.

Economically, the Putin regime has produced huge economic growth - averaging nearly 10% per annum since 2000, including growth of 8.1% in 2007. A certain percentage of this was a "dead cat bounce" from Russia’s debilitated state in 1998-99, while some was the effect of a Reaganesque tax reform passed in 2001, which produced a "flat tax" income tax system at a rate of 13%.

Since 2004, Russia’s economic growth has been almost entirely driven by high oil prices. With Putin’s partial seizure of the Royal Dutch Shell PLC (RDS.A, RDS.B) concessions in 2006 and the BP PLC (BP) properties earlier this year, it’s become obvious that the Russian state will control all economic activity in the energy sector. As a result, output has now stopped increasing; in the first quarter it actually declined slightly. New Russian President Dmitry Medvedev has announced an ambitious target of expanded output, but I remain skeptical that Russia will achieve this with its government-dominated economic system.

However, if you still find Russia alluring, you need to keep certain things in mind. Most important of all, remember that this is a highly speculative market, and you should be ready to sell if U.S. interest rates are raised, which could well signal that commodity and energy bubbles are up for a tumble. But since Russia is primarily a play on energy prices, two of the three suggestions are energy companies:

• OAO Gazprom (OGZPY.PK), the state-owned natural-gas monopoly, has ambitions to control Western Europe’s gas supplies. Since its ambitions don’t yet extend to the U.S. market, it is quoted only on the Pink Sheets. The shares are trading at 10 times trailing earnings, but gas prices and Gazprom’s dominance are both rising.
• Lukoil (LUKOY.PK) is the largest state-controlled oil company; but again, its shares only are available through the Pink Sheets. This one has a trailing P/E of only 6, based on 2007 earnings, but that was back when the average oil price was about $80 a barrel. It’s a good, but speculative, play on an additional run-up in oil prices, a trend that Investment Director Keith Fitz-Gerald has repeatedly predicted will continue.
• Vimpel-Communications (VIP) is a mobile telephone company with 55 million subscribers and mobile operations in Russia, Kazakhstan, Ukraine, Uzbekistan, Tajikistan, Georgia and Armenia. It trades at 14.3 times trailing earnings and has a decent dividend yield of 1.9%.

[The First of Two Parts]

Original post

Comments

[goulart:]

Mr Hutchinson doesn't seem to know the countries he's writing about, relying instead on superficial information he probably read from other miss-informed journalists. This is hopelessly lazy. Brazil has not just got lucky from a commodities boom. Since the first term of president Fernando Henrique Cardoso starting 1992, Brazil underwent huge restructuring. Tax reform, capital markets reform, legal reform, etc, etc. Extremely difficult political action t pull off, in the only truly democratic country within the BRIC group.

Additionally, the defeat of runaway inflation was a key driver for long-term FDI which is paying off years later. A country doesn't just achieve economic stability by luck, or conversely a country doesn't get into an economic mess by lack of luck, as any neutral observer of the US situation today would agree.

Finally, the ethanol program was a tremendous success in its first "life", during the 80s, when nearly all new vehicles sold were fueled by ethanol. It was only when the government cut sugar-cane production subsidies that the plan went into a decline in the 90s, aided by low oil prices. Today sugar-cane production is fully unsubsidized -which means the producers had to get a lot more competitive - and the ethanol program is a success. Of course, oil prices above 100 help.

Yes, the ones who are failing, disdain that success and call it luck. I'd much rather call it being ready/prepared for long-term challenges, sowing the seeds early and paying the price upfront, then reaping the benefits when the time is right. If Mr Hutchinson new anything about the BRIC countries, and Brazil in particular, and had he the mentality of a true long-term investor, he'd agree.

2008 Aug 01 05:25 AM

[Jmar11:]

While BRIC still offer opportunities, have you thought about the emerging markets (..frontiers) coming after BRIC? What do you you think of Kazakhstan?
There's an article that lists Mexico, Korea, Bangladesh, Egypt, Indonesia, Iran, Nigeria, Pakistan, the Philippines, Turkey and Vietnam as the next big countries for investors: www.greenfaucet.com/th...
While one should do their DD, it makes sense to look at other countries besides BRICs

2008 Aug 01 11:35 AM

[Objectivity:]

"...if you still find Russia alluring" ???

What an overall Absurd Analysis... but why should we be surprised?

Russia haters spout forever their nonsense, and we get such a healthy dose of it in the MSM... but it's no excuse for a book-talking stock tout to recycle it and dress it up as financial advice.

Try these facts on for size, from someone who knows better:

1. The Russian people are better off now than at any time in 91 years plus. Doubt it? Buy a plane ticket to Domodedevo and ask the first 100 people you run into...

2. Foreign and Domestic investors in Russian companies are better protected from criminal activity by managements and governments than anywhere else in the world... and if you think I'm kidding I've got just a few words for you... Fanny Mae, Freddie Mac, Enron, Worldcom, Global Crossing, Royal Dutch Shell, GM, Bear Stearns, and the whole bunch of stinking banksters that sold CDO's throughout the world and stole trillions from lied-to buyers.

3. Russia government has less in common today with the USSR than the USA today does to the old USSR, and that is an insult to the old USSR.

4. Russia's currency and financial and fiscal structure is sound... the dollar and the unfunded US debt and liabilities? Give me a break...

Go back to school Mr. Hutchinson.

2008 Aug 01 11:44 AM

[User 236244:]

heh, Objectivitist - give it a break... Russia is a corrupt cleptocracy ran by ex-Communists whose mindset will never change. Almost everbody is better off than a 100 years ago in the world today, but especially Russian oligarchs boasting their Russian pride and throwing oil money around the world. As for protection of foreign investment, are you writing this from your Kremlin office and don't read Western press ?

2008 Aug 01 03:57 PM

[dtblount:]

Overall, the article is a bit low-level and too full of opinion-flavored "facts." I do, however, generally agree on the author's position on Russia. It is, by far, the weakest of the BRICs, and does not seem to have much left to keep the economy booming. I'm bearish on Russia for several reasons:

1) Vladimir Putin...geopolitically... he is a threat to everything capitalistic in Russia. (Objectivity, your point #2 can be rebuffed with one word: Yukos)

2) Growth does not seem readily possible. The economy is near capacity and has comparatively low unemployment. Unless there is a significant shift in immigration, there is not much of an excess labor force to tap into.

3) Inflation, inflation, inflation. With solidly negative real interest rates and a passive monetary policy that does not seem concerned with inflation, this problem will only grow larger.

I'm not saying that it is a Zimbabwe in terms of investing, but it's not even close to having the potential of Brazil...

Cheers

2008 Aug 01 04:00 PM

[looking88:]

VIP is expending its business in Vietnam and Cambodia where the governments refused CHL(China Mobil)investment. VIP is a international company, covering the whole area of central Asia from Turkey to China. China Mobil now has more than 500 millions subscribers and still growing, I am sure VIP will do the same with a very similar market nich. China and Russia are very alike in terms of political system and economic policy, both emphazises stability and low debt, unlike the US's devaluation policy.

2008 Aug 01 06:46 PM

[Objectivity:]

I was waiting for the first oligarch-hired stooge or dimwit western bozo to mention "Yukos"... so here you go, Yu-ko-bo-zo

Go do your homework... Yugansk Oil company (Key piece that Yukos was formed around) was stolen in rigged bids from the Russian people, by criminals, that have since been convicted, and imprisoned. Yukos management cheated on their taxes HUGE, and was caught... you want more detail go do your DD, dodo.

Intelligent persons, like myself, did DD in advance and invested in reputable tax-paying firms like Lukoil and Gazprom... LONG AGO. Did NOT buy even a share of Yukos, because it was plain that the "owners" were obviously not to be trusted. It's actually amazing that the authorities took as long as they did to deal with those bandits.

As to the clown that states everyone is better off after 100 (91+) years, obviously you think strictly arithmatically and not in any relative sense, and then try to use that as an argument out of sync with context. And you actually are so stupid that you think I am defending oligarchs? Go away and learn to think Objectively.

2008 Aug 01 06:59 PM

[Russia is v...:]

No doubt the legacy media loves to beat on Russia. However, the Russian people are much better off now than 10 years ago. I think the primary problem Russia has for the immediate future will be population growth. It is currently experiencing negative growth rates, and unless immigration and increased births can be introduced the negative rate will be its undoing. That problem is the long term concern that must be addressed in order for Russia to remain on track as an economic supper power.

2008 Aug 01 11:33 PM

[Sincere Man:]

I'm not Russian, but spent many years of my life there, both recently and in Soviet times. There are lot of progress made in Russian macro-economic framework, but the country remains institutionally vulnerable. The average Russian citizen are stupidly proud of the authoritarian style of their governments. The elections there are a farse, but all the population make believe they live in a western-styled democracy. They do not elect their regional governments, which are pointed by central government with quite unclear criteria. There has been even an extremely ridiculous case of a magnate turned governor in a far Siberian region where he rarely visited even after becoming "elected" Governor! But for the Russians it's OK. They don't care about such small politic details. Russia has problems with most of their neighbours: the affair are always problematic from the Baltic countries to the Caucasus. Most Russians are proud of their government for the aggressive "undiplomatic" ways to deal with the neighbouring countries. The whole Russian population applauded when TV showed spectacles of deportation of Georgian citizens. Russians believe their government is right and fair and that the problems are on their neighbours side! The mayor of Moscow is a rare case of an servant who made an astonishing fortune during his endless terms in city's government and now he is ranked among the richest people in Russia. Everybody in Russia knows the man and his wife are big corrupts, but nobody cares about this fact. On the contrary, the mayor of Moscow is one of the most beloved politicians in Russia, because he is considered to be a good mayor! So... that's today's Russia: a country with huge institutional vulnerabilities and a population making believe they live in a normal democratic country. They have no demand toward democracy, they seem to be fully satisfied with their KGB-tyranny.
As always in history, the Russians get adapted to any political disgrace and even feel comfortable in it. But I do hope they will never more experience any tragedy like that ones that take place in Russia from time to time.

2008 Aug 02 01:24 AM

[Metzenbaum ...:]

India: 300,000 people with treatable leprosy. One (!) course of very cheap antibiotics cures it... and they don't have the infrastructure to deliver it.

People, don't be confused b/c every PhD in engineering comes from China or India... those are their only smart people--- that's why they are here. As for the rest... it's a long way to 2d place.

The major roads in India still have COW CARTS on them! China is the worlds biggest open toxic waste dump with no rule of law. When America stops buy their assemblies (not manufactures, they manufacture very little) all those prisoners in the PRC work factories won't have any place to sell their plastic flowers... and its the Great March all over again.

Russia is a kleptocracy. Nothing else needs to be said.

Contagion? Oh, yeah. No way in a marxist wet dream is their sufficient internal demand to lift these two out of the mire, with a waning US.

Well, that's RIC. As for the B, who cares?

2008 Aug 02 09:58 PM

[rank17:]

Re Jmar11 "There's an article that lists Mexico, Korea, Bangladesh, Egypt, Indonesia, Iran, Nigeria, Pakistan, the Philippines, Turkey and Vietnam as the next big countries for investors: greenfaucet.com/th...
While one should do their DD, it makes sense to look at other countries besides BRICs"

You're dead right...these are what is known as the N-11 or 'next 11' - another Goldmans acronym from a couple of years ago.

2008 Aug 03 02:36 AM

[jayminho:]

aside russia cleptocracy, indian cows on the road and chinese slavery manufacturing, i rather talk about brazils doomed path ahead.

when it comes to democracy, face it, the only country in this list, is Brazil. popular and "legally" elected, Luis Inacio "Lula" Da Silva, hasnt faced any global crisis. from to 2002 to 2007 everything was going perfect, not only for Brazil, but globally, everything was fine. the last major crisis we had happened back in 97 with the so called, "asian tigers".
since then, prosperity has ride a long paved road, by the end of 2007, this mint perfect road seems to have got to an end, and we entered a bumpy ride, rural zone area. watch out where you step.
the oil has gone up
the credit crisis
the food inflation
what lies ahead is not good at all, when it comes to Brazil, which has its growth relied major on energy, durable consuming goods and real state industry.

now, that was the brazil fantastic growth during the last 5-6 years,
when, energy soared what became fairy tale to brazil and russia, became a nightmare to other countries. US and European countries wont just accept this. either by imposing their force, and making OPEC to triple their oil production or by using alternative fuel sources, this brings... ethanol

ethanol is a joke, its proved to be more expensive, burning faster, so, consumes more, also, its freezing point is well above gasoline, that makes it unusable in cold weathers, and if not enough it instigates agricultures to stop growing other products to dedicate to one single thing, that brings, food inflation

with food prices going up(combined to higher transportation costs, because of higher oil) , people who just financed their houses(the real state sector) will start to deviate the money of their monthly financing in order to buy food, by doing this, banking sector whose is backing all this real state financing bonanza in Brazil, will end up taking to auction tons of just purchased houses (does that remind you guys something? a subprime deja vu?) and what happens when offer is way higher than demand ? prices go down to hell.
brazil federal bank will have to loan private banking money, so they can back their financing loans, question; does brazil has enough reserves to hold a banking/real state crash ?

then the bubble of oil burst, petrobras, and others oil companies sink, along with the banking sector and all currently trading ADRs

if brazil recurs to IMF + foreigners take their money away from Brazil, + US increases its interest rates = all money goes back to US.

brazil sinks. and so other emerging markets, each one of them on its on way and failure.

long story short: talking about emerging countries now, is stupid, its like trying to sell an outdated product or getting too late the party, or maybe, forget to run when the cops crack it down.

truth is; US will prevail, N-11 countries MIGHT be a reality, but i cant say how likely it is to happen, housing and consuming will return stronger in US.

2008 Aug 03 06:47 PM

[Sincere Man:]

Jayme,
Your reasoning is confuse, based prejudice. You are misinformed about Brazil. A banking or real state crash in Brazil? Based in what? It's complete nonsense! Be happy with your sinking economy and let the Brazilians enjoy a better life in the future. You Americans will very soon realise that the real size of your power is not as large as you imagine. It's a matter of time!

2008 Aug 03 07:19 PM

[looking88:]

It seems no international understanding here. I suggest you all go visit these countries and do some homeworks before posting.

2008 Aug 04 10:16 AM

[dtblount:]

Objectivity,

Yukos, as with every other oligarch-built-and-ope... company was the result of kleptocracy and rigged bidding. The only difference was that Khodorovsky was NOT a supporter of Putin...and that is the only reason he is sitting in a labor camp near Chita, Siberia and why Abramovich (friends with Putin) is sitting in his Owner's Box at Stamford Bridge.

I certainly hope you have sold your Russian shares that you did such excellent DD on, as the market is down around 25% YTD.

Russia is a mess right now...I'm not saying it will be forever, but I'm a firm believer that markets move with geopolitical stability/instability.... as long as Putin is still controlling his new marionette, Medvedev, I'll steer clear and keep searching for alpha elsewhere.


Cheers

2008 Aug 04 03:11 PM

[Objectivity:]

I got a bit lucky ElCid... I sold a pretty good chunk of Gazprom holding company Vostok Gas at the peak of $97 a share over a month ago, first time I took profits in Vostok since first buying at about $12 - $14 a share (and cashed in a spinoff that got my basis to $0) a few years ago... still haven't bought those shares back yet ($65 today) but I will. That's not too bad, is it? Basis $0, sale $97?

Don't let the western Media fool you. Medvedev is no puppet, and Putin is no puppeteer. As to Abramavich, I have a pretty good idea why he hasn't been prosecuted, and it isn't why you think... and he's not exactly friends with Putin, that's a myth.

Russia for most Westerners is a fog... and the would be Rulers of Russia (not Putin, his enemies) want it that way.

2008 Aug 04 09:19 PM

[dtblount:]

Objectivity,

I'm glad to hear you decided to "take the money and run." My guess is that - as with every down market in the world right now - the fundamentally-strong companies in these markets are taking some collateral damage. I see many of these firms at a "discount sale" of sorts right now, well below appropriate valuation...especially infrastructure-focused companies.

I'm not strictly following western media sources in my EM analyses. A close colleague of mine worked on the USSR/Far East desk in the CIA for nearly two decades, and her analysis of Putin/Medvedev has been extremely accurate thus far...even predicting Medvedev's rise several years out. The problem is that with the more "closed" societies such as China - and even Russia, the majority of the world's media paint a skeptical picture at best.

I agree 100% that Russia is a fog to most Westerners. In fact, any country with a significantly different social structure, political history, and overall culture are more difficult for Westerners to grasp...which is why an advantage can - and is - to be gained by those of us who take care to notice even the smallest of details and the ensuing implications.

The facts, however, cannot be ignored. Unemployment is too low, capacity utilization is too high, and inflation has grown too high and unchecked for growth to continue. With oil falling around $120, and metals falling alongside, I am quite bearish on Russia.


Cheers

2008 Aug 05 12:12 PM

[mkreisel:]

I know better than to trust Russian ruler's "benevolence".

These guys have a history to screw over dirty capitalist pigs, also known as investors.

2008 Aug 09 12:30 AM