Sorting Through the BRICs

03/22/2010 12:01 am EST

Focus: GLOBAL

Deborah Owen

Columnist, The IRS Report

India and Brazil are better bets on a pullback than China or Russia, writes Deborah Owen in The IRS Report.

The Federal Reserve has begun to look at calling time on this extraordinary period of monetary easing but, as both [chairman] Ben Bernanke and the Governor of the Bank of England, Mervyn King, have made clear recently, they do not believe the private sector in either the US or the UK is robust enough to allow them to withdraw their support measures just yet.

The monetary tightening process is, however, already underway in some of the BRIC (Brazil, Russia, India, and China) countries. I believe the swing in the balance of economic power from west to east will provide some excellent buying opportunities. We have already seen shares in the traditionally sedate mining companies rocketing up. The stock markets of the BRIC economies have also enjoyed strong rallies, but don’t worry if you have not yet started investing in these markets—you may well get another bite at the cherry.

The Chinese market bottomed ahead of western markets in November 2008 but has not regained the high made in August 2009, and it is looking increasingly as if it is forming a top pattern. The Shanghai Composite index has fallen below its 200-day moving average. The other BRIC markets are still above their 200-day lines (although in the case of India, only just), but they have all fallen below their 90-day moving averages.

Like everyone in the financial markets, I am extremely impressed by the consistent returns that Anthony Bolton delivered in his UK Special Situations Fund, but I do wonder if he may come to regret his decision to try [to] do the same thing in China. A majority stake in most large companies in China is still owned directly or indirectly by the government and the market is susceptible to official “direction.”

India, with its relatively slower growth than China, is often described as the tortoise. But remember who actually won the race. The fact that shares are allowed to trade freely and it is a democracy will, I believe, eventually work in India’s favor. Brazil is another country with exciting potential. There may be a political wobble later in the year as President Lula de Silva is not allowed to stand for a third term, but the country is emerging on the world stage in much the same way as China did in 2000.

Russia is a much narrower play on the oil and gas market, and for that reason I prefer to stick with India and Brazil to back the emerging markets trend. One of the features of the BRIC markets is their volatility. These markets are already 10% off their highs, and I would not be surprised to see at least another 10% decline. But I believe all investors should keep them on their watch lists and be ready to invest or add to existing positions.

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