Broken BRICs: How Their Bear Markets Are Affected By Commodities

by: Daryl Montgomery


The four BRIC markets are all major commodity producers, but their stock markets are impacted in different ways.

China and Indian stocks are more closely correlated to moves in Western stocks.

The Brazilian and Russian stock markets move with the overall commodity market.

Russian stock ETFs and broad-based commodity ETFs can substitute for each other.

While U.S. stocks are struggling between bull and bear status (only the Russell 2000 has lost more than 20% from its peak so far, although the Nasdaq has come close), the BRIC countries (Brazil, Russia, India and China) have been bearish with declines ranging from 23% to 70%. Their bear markets began either around the same time as the Russell's (China and India) or at the last high in commodity prices, which took place in April 2011 (Brazil and Russia).

Emerging markets tend to be commodity-based economies. Even though China has broken away from this dependency and is now predominantly industrial (and it is certainly questionable whether or not it should still be considered an emerging market), it is still a commodity producing powerhouse. China is a top-three global producer of gold, silver, aluminum, copper, lithium, rare earths, coal, rice, wheat, corn, sugar, beef, hogs, and cotton.

The only commodity sector where it lacks strong production is energy. Since it is far more developed in manufacturing than the other BRICs, its stock market behaves differently from them. It is prone to bubbles even more so than the advanced economies. The Shanghai Composite peaked on June 12, 2015, just days before the U.S. Russell 2000 index topped out and has been down as much as 49%. The chart below indicates that stock prices in China and commodity prices have little relation to each other. Market conditions in China are covered in more detail in: "China Stocks: From Bubble To Bear Market".

Shanghai Composite Compared to Commodities (Yellow Line) 2006-2016

India is not as far along as China on the road to industrialization, although its stock market is more in sync with China and Western markets than with the other two BRICs. So far, India is less prone to the extreme bubbles seen in its neighbor. India is also a major commodity producer, but not at the level of China. Its strength is in agricultural commodities and like China it is weak in energy resources. The main stock index, the Sensex, peaked in March 2015 and has been down as much as 23% from its high. It can be seen from the chart below that the Sensex did not move in sync with commodities after 2011. The red line in the chart is the current bear market.

SENSEX Compared to Commodities (Yellow Line) 2006-2016

Brazil, even though it has been industrializing for years, has a stock market that is still heavily affected by commodity price movements. Like India, its strength is more in agriculture. It is not a top oil producer, but does have offshore oil deposits. The Brazilian Bovespa index reached a high in November 2010, five months before commodities topped out. Recently, a political crisis has been weighing on the market in Brazil, but the selling started years ago. After more than five years, stocks have dropped approximately 49% in Brazil (ironically, the same as in China, although that only took nine months). The chart shows how closely commodities and Brazilian stocks are connected. The relationship is fairly close, but not exact.

Bovespa Compared to Commodities (Yellow Line) 2006-2016

Russia is arguably the most commodity-rich country on earth. Unlike the other three BRICs, it is weak in farm related products because of its frigid climate. Instead, its strength is in energy and metals. Russia has the largest natural gas reserves in the world and is the top ten in oil reserves. It is also second in coal and third in uranium. It is one of only two countries with major platinum and palladium production, is the top nickel producer and is second in aluminum.

No country has stock price changes as correlated to commodity price changes as Russia. The chart shows that it is close to an exact fit. Russian stocks, though, tend to be more volatile than commodities, going up and down more at the extremes. It should also be noted that Russian stocks never got back to their pre-Credit Crisis highs in the rally that followed. Russian stocks have dropped approximately 70% since 2011.

Russian Stocks Compared to Commodities (Yellow Line) 2006-2016

Commodities overall have fallen 63% since their peak in April 2011 based on the broad-based commodity ETN DJP (used as the proxy for the market and represented by the yellow line in the charts). Of the BRICs, the Chinese stock market has the least correlation to commodity prices and India doesn't have much of a relationship as well. The Brazilian stock market does move with commodities, but the connection is somewhat loose. Russian stocks, however, move in the same direction as the overall commodity market and by a similar amount. ETFs for Russian stocks could therefore be used as a substitute for broad-based commodity ETFs (and the other way around).

Russian stock ETFs are: RSX, RBL, ERUS. There are a number of broad-based commodity ETFs and ETNs, these include: CMDT, DBC, DJCI, DJP, DPU, FTGC, GCC, GSC, GSG, GSP, PDBC, RJI, UCI, UCIB, and USCI.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.