by Martin Denholm, Managing Editor, Smart Profits Report
Keep an eye on the Chinese and Brazilian stock markets on Monday.
The two emerging market nations - both members of the BRIC group (Brazil, Russia, India, and China) - will each welcome a major new IPO to their respective stock markets.
The fact that they’re debuting on the same day is purely coincidental, but the story here is that both are very significant not only to their own countries, but could also underpin the emerging market area.
Let’s take a look at these IPOs in the context of the broader emerging market topic… the effect this often volatile but flourishing pack of nations is having on the global economy - and how you can hitch a ride…
Emerging Markets Rebuilding Momentum
In the excellent movie “Wall Street,” Michael Douglas’s slimy Gordon Gekko character famously proclaims, “Greed is good. Greed works.”
Some equally unscrupulous Wall Street characters lived by this mantra. But they became so fat and bloated that they clogged the arteries of the entire financial system. Greed was most definitely not good - and it certainly didn’t work.
When the system toppled over, little was spared. Certainly not emerging market nations, which were unable to withstand the worldwide financial earthquake. While their GDP growth is rapid and their economies are flourishing, they’re still raw in terms of crucial elements like infrastructure, and are more susceptible to volatility.
So when the U.S. sneezed, the world caught Wall Street’s swine flu (ironically caused by swines in the first place). Emerging markets fared just as badly (or worse in some cases) as the U.S. and other global heavyweights like Japan and Europe.
But the big new IPOs in China and Brazil signal that the tide is gradually turning and emerging markets are rebuilding their momentum…
China’s 9-Month IPO Itch
The fallout from the global meltdown crushed China’s Shanghai Composite (^SSEC) stock market by 60%, prompting regulators to impose a 9-month ban on new IPOs.
But on Monday, small-cap Chinese drug maker Guilin Sanjin Pharmaceutical Co. will end it by debuting on the Shenzhen market, the smallest of China’s exchanges. The move comes on the back of a scorching 58% climb for the Shanghai Composite this year, amid confidence that the government’s multi-trillion yuan of stimulus money will help the flagging manufacturing sector and trade market.
After a 9-month IPO absence, the decision to “start small” with the Guilin launch is a good one (the firm will offer 46 million shares). A mass relaunch, with bigger, more heavily hyped companies could put too many shares on the market at once - and high-profile disappointing debuts could knock confidence. When the ban was imposed, 37 companies had received IPO approval, so this may kick off a new wave.
Meanwhile, in Brazil…
Brazil Goes Big… And Lula Bangs The BRIC Drum
Like China, Brazil’s stock market is also up big this year. Not as big as Shanghai’s 58% surge, but the 35% year-to-date gain for Sao Paolo’s Ibovespa (^BVSP) is still impressive.
Besides, Brazil is expected to take advantage of that run by notching up the biggest IPO of 2009 so far - and the biggest in its own history, too.
On Monday, credit card firm Visanet SA will hit the stock market - and is estimated to rake in $3.6 billion. That will thrash 2009’s current highest IPO - China Zhongwang Holdings, which launched on Hong Kong’s Hang Seng (^HSI) with $1.2 billion raised.
IPOs like these signal that the BRIC economies are once again on the move - with Brazilian president Luiz Inacio “Lula” da Silva banging the drum when leaders of the four nations met in Russia last week.
Quoted by Reuters, Lula proclaimed: “The good news is that rich countries are in crisis and emerging countries are making a huge contribution to save the economy and, consequently, save the rich countries. Wealthy countries are no longer the only ones that account for the world’s production capacity and consumption.”
That’s true. But how much of it is attributable to emerging markets?
Redressing The Global Imbalances… BRIC-Style
The BRIC meeting last week was a chance for the four leading emerging market nations to come together and plot their triumph over the mammoth, industrialized economies.
Okay, not quite. But in the first summit of its kind, the four countries definitely did discuss using their existing strength to enhance their fortunes on the global market even further.
In short, that means addressing the balance of the global financial system - a debate that included ideas on how to create more diversity away from the U.S. dollar as the world’s dominant currency and give the BRIC nations better representation on the global stage.
Or, as Lula da Silva and Russian president Dmitri Medvedev respectively put it, to “change the political and trade geography of the world” and “create conditions for a more just world order.”
Medvedev argues that you can’t have a balanced, successful global system if most of the markets are priced in U.S. dollars. He’d like to redress that imbalance by having Russia buy bonds from the other BRIC nations in return for them upping their ruble reserves.
But with the Russian ruble, Brazilian real, and Indian rupee down 35%, 25%, and 35% this year respectively, those currencies aren’t exactly blowing the dollar out of the water.
So can the BRIC succeed with its plans?
These Davids Won’t Slay Goliath… Yet
According to Reuters, the BRIC nations currently account for about 15% of the global economy.
In addition, while the U.S. racks up GDP of about $14 trillion per year alone, the BRIC nations’ combined total is only about $9.4 trillion. And the GDP per capita, poverty levels, and infrastructure in these countries are significantly worse than in the U.S., with America doubling the output of the BRIC countries combined.
So the BRIC group clearly has a long way to go to usurp the big boys. But Goldman Sachs predicts that by joining forces, it’s possible that the BRIC nations could surpass the G7 in 20 years time, with China’s economy climbing above the U.S.
However, with China’s GDP almost surpassing the combined total of its three fellow BRIC members, the group itself is imbalanced. In addition, the BRIC is not a formal union. All four countries have substantial differences and while they remain heavily tied to the U.S. and other big nations in terms of trade (with India and Russia receiving U.S. aid, too), there’s no way any of them want to rattle the saber by laying down the gauntlet. Not while they also hold almost one-third of U.S. Treasuries.
What they do have in their favor at the moment, though, is GDP growth…
An Emerging World Of Growth
Those were the GDP growth totals for the BRIC nations in 2008, compared with the U.S. economy’s contraction of more than 6%. And even the BRIC’s current impressive pace is a slowdown from the red-hot growth seen before that.
What’s more, that growth isn’t artificially stimulated by government printing presses alone. The economies are growing in their own right.
This year, China and India are expected to grow by 7.2% and 6.2% respectively, with China accelerating to pre-global meltdown levels of 8% and 9% during the third and fourth quarter.
So with that, some investment options for you…
Investing In The BRICs
For the sake of diversity and ease of investment, I’m going to focus on ETFs here.
If you want a broad emerging market play, take a look at the iShares MSCI Emerging Markets ETF (NYSE: EEM).
For investments in the specific BRIC nations combined, consider these:
~ iShares MSCI BRIC (NYSE: BKF)
~ SPDR S&P BRIC 40 (NYSE:BIK)
And for investments in the specific BRIC nations individually, take a look at the following:
~ China: iShares FTSE/Xinhua China 25 Index (NYSE: FXI)
~ Brazil: iShares MSCI Brazil Index (NYSE: EWZ)
~ Russia: Market Vectors Russia ETF (NYSE: RSX)
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One is a fund run by one of the world’s top emerging market portfolio managers, with two-thirds of the portfolio allocated to Asia and one-quarter to Brazil, spread across many industries. The other is an Indian tech giant, whose shares have outperformed the broad U.S. market impressively over the past couple of months. Join XPR today and you’ll be able to get the names of these investments, plus all our other recommendations. Click here for more details.
Disclosure: No positions