Should BRICs Become BICs For Investors?

Includes: ERUS, RBL
by: Timothy F. McCarthy

Russia is not in the same investment league as Brazil, India, and China.

The evidence of a corruption-stifled economy has been building over the past decade.

In recent years, several other countries have emerged into a growth stage and offer opportunities for investors.

For many global analysts, Russia has been on their 'watch list" for some time. By most criteria, the country scores poorly when factoring in the level of corruption. Experienced investors know that even after nations have emerged and are on a clear growth path, corruption can continue to be a drain on society, particularly in countries with large populations. Indeed, we Americans remember our own history and the level of corruption at the turn of the last century just as we emerged into a high growth stage. However, in the case of Russia today, the breadth and depth of corruption is so pervasive that it saps the energy from most all economic sectors and simply stunts any chances for growth.

Over the past decade, commodity rich Russia attracted adventurous investors despite the cancer of pervasive corruption. But after observing the tens of thousands of disguised soldiers shipped in by the Russian government into Crimea over the past few weeks, it is clear even to optimists that Russia is not being run based on rational economic objectives for its people or for investors.

The evidence of a corruption stifled economy has been building over the past decade. I recall it best said to me privately by a major global REIT fund exec, "In China and in India, my team has been able to find selected quality properties that operate in a reasonably predictable fashion, at least after they are finished and rented up. However, in the case of Russia, at any level, you never know when government officials will take away all your rights. I just can't find anything there that is safe for my funds to invest in."

Public Sector Corruption Perceptions Ranking 2013, With Highest Being Worst:

  • Russia: 127th
  • India: 94th
  • China: 80th
  • Brazil: 72nd

Data taken from Corruption Perceptions Index © 2013 Transparency International. All rights reserved. Transparency International's 2013 Corruption Perceptions Index ranked 177 countries/territories based on how corrupt a country's public sector is perceived to be.

Other Metrics when compared to major growth countries, such as China, India and Brazil also show that Russia does not make the long term investible grade. For instance, Russia has roughly seven times the illicit financial outflows/capita than either China or Brazil.

Illicit Financial Outflows Per Capita Between 2002 And 2011

  • Russia: $6,182
  • Brazil: $959
  • China: $800
  • India: $282

Core Data from World Population Statistics, CIA World Fact Book, Global Financial Integrity; Illicit outflows shows the total amount from 2002 and 2011 while per capita is based on 2012 population.

Clearly, Russian citizens do not want to invest their own money in Russia.

There have also been other disturbing trends over this past decade. Even including the tremendous output of commodities, Russia has not been able to grow much more than the Developed World -- hardly a long term growth opportunity for investors. Its demographic metrics likewise put the country more in the mature to declining group of nations with its population actually in long term decline estimated by 2015 to decrease about 1.6% per year. Its peak was in 1992 at around 149 million; whereas today it is estimated to be 143 million. With an average age of the population at 39 years, the country will face the same demographic negative challenges that we see for the Developed economies (Index Mundi). Even more troubling, due largely to heavy liquor consumption, the life expectancy for men in Russia is 64 years, placing it among the lowest 50 countries in the world in that category. (Oxford University).

Furthermore, when you look into the structure of the public markets, due to the high concentration of the Russian State and Oligarchs owning Russian companies, there are very few investable companies which results in a very crowded market for investors looking for stocks that are not overly influenced by the state agenda.

Thus, Russia does not look to be a country for investors to accumulate in their investment pocket. The question then remains, what if you already own a lot of Russian stocks and bonds? Given that prices are now so low, is it wise to sell? Of course, this is a personal decision for each investor. For instance, if you are an optimist and think the political situation will soon settle down, then the rock bottom prices of several Russian companies could spring back quickly. However, at a minimum, you may want to at least look at owning a significant amount of the Russian stock or bond market for what it really represents, which is a trading position rather than a long term investment position.

I should point out that it is wise not to mix in your personal biases and political views with your investing strategy if you want to take advantage of a maximum number of opportunities for your portfolio. However, in the case of Russia, there are plenty of valid economic reasons to look at the country as more of a Frontier or "Country for trading purposes only", rather than deserving a long term material position in your Investment pocket.

It is important for investors not to be discouraged from broad global investing by events in Russia. Fortunately, over the past decade several other countries have emerged into a growth stage and offer opportunities for investors. Although negative news is frequently front and center in the Western Press, much of the positive news on the better quality growth countries does not get the attention it deserves. For instance, we have read for the past two years about the pending downturn in China due to property values and debt levels as well as considerable discussion about the "Fragile Five." (Emerging-markets countries that concern analysts with their high debt levels and/or Political instability include South Africa, Turkey, Venezuela, Argentina, and Indonesia.) Yet the reality is that the combined GDP of China, India and Brazil is now greater than the US and represents 40% of world's population (World Bank, CIA World Fact book). In addition, other countries have emerged, kept their debt/GDP levels in check and are in a growth stage. They include such geographically and economically diverse nations as: South Korea, Taiwan, Philippines, Poland, Hungary, Mexico, Columbia, Peru and Chile, just to name a few. As a package, they deserve at least a minority portion of your global long term portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I do not have any direct Russian exposure, either long or short. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.