The End of the BRIC Trade

In a crisis, as we all know by now, all correlations go to 1. But it's still interesting to see how similarly the BRICs have behaved. Floyd Norris has their respective declines:

Brazil, down 55%
Russia, down 65%
China, down 57%
India, down 58%

All of them have underperformed the US; none of them was remotely a safe haven. But I have a feeling that when this crisis has passed, we'll see a redifferentiation of the BRICs. They might have risen and fallen together, but I doubt they'll rise together the second time around.

Think of the BRICs on three main axes: politics, demographics, and commodities. Russia and Brazil are both big commodity plays, for instance, but they're worlds apart on the political and demographic axes, where Brazil looks much more like India. The political risk that has decimated Russian stocks still hasn't been priced in to Chinese stocks, and barely exists in India. China's population is large, but it's getting older, and it's not growing very fast, thanks to the one child policy; Russia's population is actually shrinking.

During the irrational exuberance of the BRIC boom, investors seemingly paid little attention to these differences. But looking forwards, I simply can't imagine that the four countries are going to continue to move in lockstep any more. My gut feeling is that Brazil remains a great long-term investment, while Russia, over the long term, is going to continue to be an unpleasant place for foreign investors. But I might well be wrong about that. What I'm much more sure about is that the correlation between the two is going to come down. After all, it can hardly rise much further.

Comments

[andyn]

Brazil and India look good in the medium term from a risk/reward point of view.
They have a robust domestic sector which will keep growing their economies.
Brazil also has commodities - which even though has fallen hard - is still valuable.
India will keep growing at 7% due to its partly opened economy which weathers externals better.

Russia is too iffy with Putin at the helm.
China is too dependent on exports and remains to be seen if it can get its internal markets to sustain its torrid growth.
Buy EPI/PIN/EWZ and sell Russia/China.

[user278494]

You are absolutely wrong on Russia.It seems to me your opinion is very superficial and is not grounded by any fundamental arguments. Nowadays Russia is much less dependent on commodities' exports to keep growing...And certainly you underestimate very vast (and underdeveloped)Russian domestic market and restructuring prospects for some Russian industries...Don't concentrate on politics (and Putin) only,guys! let's have a broader view!

[philly jim]

But I was just becoming facinated with the chlid death squads of Brazil, organized crime of Russia, filthy streets of India, and totalitarian style of China. What a shame, guess I'll have to sell and park my money back in the good ol' USA.

[Swedish investor]

Philly Jim, perhaps you missed the fact that Russian organized crime can be found in America in many areas, and have you looked at the streets in some American cities ? Also filthy. Or how about George Bush's totalitarian style of government, at least until that failed. Not to speak of poverty in the USA or the ever widening gap between the rich and the middle class. Yes, park your money in the good ol USA, you happy patriot.

[mwswi]

Interesting article, Felix. We'll have to see how your theories play-out in the years ahead. Personally, I still think China and India will be forces to be reckoned with between now and 2050 (perhaps becoming, as German economist Gabor Steingart states, "Masters of the Universe"). Still, your article provides food for thought. Thank you for posting it.

[JasonC]

It is hardly happy patriots alone, to the America-haters. The dollar is flying, and no one believes in return *of* capital outside the developed world. You-lot wanted to pretend no one needed America and pushed until things broke - now you will learn that the opposite is true. If an American banker in New York cannot borrow on reasonable terms, nothing on the planet is worth anything. And none of it lets up until you back the heck off.