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Stock Ideas Investors Daily Edge BRICs or Straw(Brazil-Russia-India-China) Explained
Stock Ideas Investors Daily Edge BRICs or Straw(Brazil-Russia-India-China) Explained 
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| BRICs or Straw(Brazil-Russia-India-China) Explained |
| Tuesday, 30 September 2008 | ||||||||
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BRIC (Brazil-Russia-India-China) countries make a funny group. It’s not easy talking about them as a group. You have a badly managed commodity exporting country (Russia) ... a well-managed farm product-exporting country whose cagy leader is losing his reforming zeal (Brazil) ... a high-tech economy very dependent on business from the U.S. (India) ... and a fast-expanding country where inefficiency still abounds (China). China is the biggest and most important of them all. It wants to sustain double-digit economic growth. And if it can’t, you can kiss global growth good-bye. They got grouped together not because of what they all had in common but the vast promise they all share. Even on that basis their commonality is suspect. Brazil is far ahead of the pack in its economic development. That may make for slower growth. But its middle class is much bigger (in relative terms) than the other BRIC countries. Now, unfortunately, they have another thing in common. Their equity markets are all tanking together. So, why are these vastly different economies suffering equity meltdowns of 30-60 percent? To begin with, they grew too fast. They got overvalued. They were ripe for a pullback. And that’s what happened when their export markets dried up and their governments took monetary-tightening steps. Are BRICs going to suffer the same as the U.S. and Europe? Or are they going to forge their own path and avoid the worst of the economic meltdown we are going through? Here’s what I believe... 1. Putin Painted into a Corner. The Russian economy has grown for nine straight years on the back of soaring oil and gas prices. But things have gotten so out-of-hand that Russia had to shut down trading a couple of weeks ago and pump $100 billion into its faltering banks.
Now oil prices and gas prices are down. Inflation is running at 15 percent. Its little incursion into Georgia helped spur over $55 billion of capital to flee its equity markets. The verdict. Russia came back strong when it defaulted on its national debt in 1998. But where’s the growth to come from now? Oil output falling along with prices will prove a tough combination for Russia to overcome. 2. Chinese Leaders Hope Slowdown Is Temporary. Manufacturers in China are increasing profits at about half the pace as last year. And this is the fourth quarter in a row that economic growth has slowed. The government is now pushing growth over fighting inflation. It’s making it easier for banks to lend. And it won’t hesitate to make use of its $1.8 trillion dollar cash reserve to finance infrastructure projects – including a slew of them in western Sichuan Province where the earthquake hit last May. Is it enough to reignite growth? Metal traders (not the speculators – these are the folks who trade the physical metals) tell me that demand for nickel has slipped but demand for other metals like copper and manganese is still running high. The verdict. Every time you shop at Wal-Mart, you help pay for the salary of a Chinese factory worker. China has the means and motivation to keep economic growth around its current pace of 10.1 percent. But if you stop shopping, Chinese factories will go on a firing binge. And China’s economic growth spree could come to a screeching halt. 3. The Raj’s Rough Year. The Indian government has been treading a fine line between controlling inflation and keeping growth going. Inflation has slowed. But so has the economy which will be lucky to reach a rate of eight percent when the year is finished. It was expected to grow a half-to-a-percentage point faster. With commodity prices falling and inflation at its lowest rate in five weeks, the government is once again throwing its weight behind growth. It’s expected to soon lower its prime interest rate. And that should help consumers buy cars and other big items. The verdict. India’s high-tech low-wage English-speaking work force has a lot going for it. But its economy is closely tied to Western economies. Even though Indian banks aren’t in trouble like they are in the U.S., tight credit is squeezing a lot of growth out of the economy. Don’t be surprised to see India pulling up the rear among the BRICs. 4. Brazil Still Blazing. The government is looking at current-account deficits for the first time in several years. But that’s not the worst news. President Lula da Silva may be going soft on economic reform. It looks like labor, taxes, and social security are no longer on top of his agenda. The economy is still going strong. Last quarter it grew over six percent. For the past 12 months it has grown 5.8 percent. For Brazil that’s fast. And unlike India and China, Brazil continues to raise interest rates to cool off inflation. The verdict. Brazil’s vast offshore oil reserves should keep its economy going strong for the next 10 years. But only if its state-controlled oil company – Petrobras – has access to global capital. The bailout could help Brazil almost as much as the U.S. With all the hype on BRICs being the wave of the future, only Brazil could withstand the economic slowdown in the U.S. and Europe. As I said, it’s hard to talk about the BRICs as a whole. But this one thing is true. They’re not immune to the world’s economic problems. And even Brazil will suffer if the U.S. can’t solve the credit crisis. P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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