The 2 BRICs That Are Bouncing Back

Includes: EEM, EPI, EWZ, FXI
by: Emerging Money

By Mitchell Hall

Beware naysayers who trumpet the demise of the BRICs (NYSEARCA:EEM). While Russia's slowdown may continue into next year, and Brazil's growth is currently lower than the U.S., the Chinese economy and Indian markets appear to have bottomed out.

A recent Reuters poll indicates that Russia's economy will continue to slow next year as weaker exports and consumption growth take a toll, leading the central bank to cut interest rates in the second quarter.

Meanwhile Brazil's economy continues to languish both the BRICs and America, with 2012 GDP expected to come in below 1%, thanks mainly to muddled, protectionist government policies and the slowdown in China, Brazil's biggest export market.

China’s economic growth slumped to a three-year low of 7.4% in the third quarter.

China however, does appear to have avoided a hard landing and bottomed out in 2012. China's economy (NYSEARCA:FXI) now looks to be on track to hit GDP growth of 8% in either the fourth quarter of this year or the first quarter of next year.

HSBC's purchasing managers’ index (PMI) hit 50.5 last month, up from 49.5 in October, putting it above the 50 mark that indicates growth. A reading below signals contraction. At the same time, manufacturing in China has spiked to a 13-month high.

Chinese exports are increasing thanks to a pick up in demand in Europe and the U.S. according to HSBC. The government's lowering of interest rates and bank capital requirements has increased lending, and the real estate sector has seen prices rise for six consecutive months.

Infrastructure spending appears to be starting to work its way through the economy, although analysts caution that smaller firms are reporting the weakest conditions in six months, with recent improvements "driven almost entirely by large firms,” according to Mark Williams, chief Asia economist at Capital Economics.

“Medium-sized firms have seen no meaningful improvement while the sub-index for small firms fell last month to 46.1, the lowest since May,” he said.

“This fits the view that recovery is being driven by spending on infrastructure, which tends to benefit large industrial firms.”

Second largest in the BRICs, India's economy (NYSEARCA:EPI) is not following China's lead. Third quarter growth fell slightly to 5.3% from the second quarter's 5.5%, and overall growth this year will likely be the lowest in a decade.

Net exports were a major drag on India's growth, subtracting 1.3 percentage points from growth versus -0.2 percentage points in the second quarter.

With the economy struggling, the Indian government has launched a series of relatively bold reforms in September, including raising prices for subsidized diesel and opening the politically-sensitive retail sector to foreign investors, sparking a rally in markets.

The Financial Times reports that:

"The benchmark BSE Sensex index shot above the symbolically important 19,000 mark for the first time in nearly two years late last week, in part, buoyed by flows of funds from abroad and a sense of decreasing crisis in the eurozone.

"The Sensex now trades at 15.8 times estimated 2012 earnings, higher than the average for Asia ex-Japan of 12.7 times, but slightly shy of the Indian market’s five year average of 15.9 times."

Market participants in the second largest of the BRICs seem confident India’s stalled growth will improve in 2013. Regardless of whether the government can push through a second round of reforms, stronger future earnings are expected thanks to signs of easing inflation and a consequent round of sustained interest rate cuts.