BRIC Investing Is Bogus

07/31/2008 12:00 am EST


Vivian Lewis

Editor and Publisher, Global Investing

Vivian Lewis thinks trendy BRIC investing has had its day, and investors need to look at the individual countries.

There is no such thing as a BRIC, although to judge from the Wall Street purveyors of fashion, this is heresy. Consider the different financial paths being followed by Brazil, Russia, China, and India.

Brazil is a practitioner of classic western economics. It tries to fight collusion of pricing, raises interest rates to prevent inflation, charts growth warily—happy for its vast population of poor people, but worried that export demand for its raw materials will spill over into high domestic prices. Brazil learned its lesson with exotic economic policies the hard way, so that even a left-leaning Latin government does not go off track.

Russia is a different story. Recently, JP Morgan Chase issued a report on Premier Vladimir Putin's “non-conventional methods” for fighting inflation, which is higher in Russia than the rest of the BRIC countries. (In the past year, prices in Russia are up 15.1%—Editor).

Putin does not really want to fight inflation in the oil and gas sector, which is financing the country and is supported by elements in the Kremlin. But he wants to crack down on the private sector in other parts of the economy. So, a proliferating series of investigations are taking place focused on supposed tax evasion and collusion over prices.

This feeds on the fact that nobody really knows what the law is. JP Morgan says Russian stocks are now to be "reduced" because of the increased pressures on businesses there.

India is also going classic, with a third interest rate increase in the last two months imposed by the Reserve Bank of India. That brings the cost of money up a half percent to 9%. This should fight inflation, but will inevitably moderate growth.

China, meanwhile, is oblivious to the risks, at least in the run-up to the Olympics. Chinese companies are keen to raise capital as long as the renminbi is still fixed at a low rate to the dollar. So, a bunch of small, “me-too” companies are tapping the ADR market in the US. This has the incidental effect of cutting the scarcity value of their competitors who listed earlier. And it also provides capital to them.

This week underwriters Citi, Merrill, andMorgan Stanley bring to market Chinese companies in the businesses of long-distance learning, media, and chips. Nothing odd about it except nobody else is doing initial public offerings these days, and few deals are for such small amounts (all under $100 million.) Don't go for China Distance Learning, China Mass Media International Advertising, or GCL Silicon Tech (all slated to go public—Editor.) In fact, I think maybe I will put a ban on any new share with the word China in its logo.

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