Always consider hidden risks
SP500 and BRIC : An Emerging Opportunity ?
( From CPB, Trading Economics, Reuters, Stockchart. Barchart, Sober, Yardeni.com, Emerging Markets, CME , IMF )
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The BRIC s Economy has been caught in a Perfect Storm : World demand slowing, commodity prices weakening and Government
caught to cut expenses... But the stock markets of those countries has been battered lately and start to become an opportunity
compare to the Mighty SP500.
BRIC s GDP
GDP (nominal) in US dollars % Total BRIC s GDP % World Economy
Total : $14,574 billion (2012 estimate) 100.0 20.4
China: $8,250 billion
Brazil: $2,425 billion
Russia: $1,953 billion
India: $1,946 billion
World GPD 71,277 100.0
Let s have an overview of the BRIC Countries in term of importance in the world economy as shown by the table below...
The so-called BRIC countries - Brazil, Russia, India, and China
- are struggling hard to ease policies and maintain economic
growth in the face of a slowing global economy not of their own
making. Unfortunately, country-specific internal challenges
are making their economic deceleration more severe.
A significant portion of the
world’s GDP growth during that decade was fueled by the
BRICs. This suggests that a BRIC slowdown now will be more
detrimental to the world economy than it would have been in
he not so distant past..
The most important reason for the growth slowdown is the
ever worsening economic situation in Europe, followed closely
by the general lack of economic leadership and market
confidence coming from the aging industrial countries. One
cannot, however, lay all of the economic challenges in the
BRIC countries at the doorstep of Europe’s debt crisis and
the massive policy uncertainty associated with the fiscal cliff in the US. The BRIC economies also face very
distinct issues and structural problems of their own, which are
strikingly different from country to country, and in many cases
work to constrain their abilities to offset the negative forces
coming from the mature nations.
The economic slowdown in the BRICs is more severe than
many had expected and hoped, and the implications for global
markets are just now being appreciated. The rising BRIC share
of the global economy means that the world has ratcheted up
another notch in terms of financial and economic integration,
with implications from energy to commodities to currencies
The most obvious ramifications of the BRIC slowdown are
on the commodity front. BRIC countries and their emerging
market colleagues were the drivers of economic growth in the
past decade, which meant they were the drivers of commodity
prices. As economic growth decelerates rapidly in these
countries, so does energy and commodity demand. Downward
pressure on oil prices and other key commodities, such as
copper, are likely to continue until one can be sure that the
growth trend in the emerging market countries is moving higher
BRIC s can be part of a global rebound in the world economy... And their stock markets are very cheap compare to the Mighty SP500.
Reasons behind emerging markets correction
A confluence of recent events has been pressuring emerging countries' equity markets. Over the past couple of years emerging and developed markets have been moving in lockstep, but the two have diverged recently.
What's behind this underperformance in emerging markets stocks? It seems that a number of simultaneous developments has contributed to the sell-off:
1. The spectacular decline in shares of Apple has put downward pressure on some of its Asian suppliers and related technology firms.
Read Also : Apple Major Suppliers Locations 2013
2. Weaker than expected growth in China is contributing to the sell-off.
Read Also : Think 7% growth in China is slow? Try 6%
3. The emerging strength of Japan's exporters due to rapid yen devaluation is hurting the regional competitors, particularly in South Korea. The KOSPI index is down over 6% year-to-date.
IMF global growth outlook lowered slightly
The IMF's World Economic Outlook cut global growth projections slightly, but said the manufacturing and trade cycle has begun to reaccelerate
The reacceleration in the global manufacturing and trade cycle happened particularly in the emerging market economies, with many advanced European economies lagging behind the global upturn, the IMF's updated World Economic Outlook (WEO) showed.
The Fund forecasts that world output will increase by 3.3% this year, 0.2% lower than in a previous estimate in January, with advanced economies expanding by 1.2% and emerging ones growing by 5.3%.
Russia's outlook was cut by 0.3% to 3.4%.
China is seen expanding by 8% this year, nearly flat from January's projection, while India is expected to grow 5.7%, an estimate that is 0.2% lower than in the previous WEO update.
Brazil's growth estimate was cut by 0.5% to 3% while Mexico's remained nearly flat at 3.4%.
"Emerging market economies are in general doing well," Oliver Blanchard, IMF economic counsellor and director of Research Department, said in a news conference.
"So far and to their credit policy makers have generally succeeded in keeping aggregate demand in line with output growth," Blanchard said.
"At the same time potential growth has declined in some of the emerging countries and we shall not see again the high growth rates of the past."
Right now, better be in Emerging and developing stocks than advanced economies because of their growth potential as you may observe in the chart below...
4. The recent violent commodity sell-off especially in metals and energy is pressuring commodity producers such as Russia. Russia's export sector is a one-trick pony, except for some arms sales and a sprinkle of IT services. That's why with oil sharply lower, the Russian stock market is down 17% year-to-date. Other commodity exporters, from Brazil to South Africa, got hit as well.
Because the BRIC are a huge importer of basic products and commodities for their own gwoth needs, prices of those are really a huge factor of demand. We took the CRB Index to overview the evolution of the prices of commodities. What we observe is the same trend
5. Negative economic surprises in the US are not helping. The US index of leading economic surprise indicator is slowing. As discussed, the US has entered its fourth year of seasonal spring slowdown (see post). Expectations of weaker demand from the US are hurting emerging market indices.
To see the underperforming areas that have caught my attention this week. One of them is emerging markets. This have been an underperformer for a while now. When the Apple bubble popped in September, its outsized weighting has dragged the tech space down ever since, specifically on a relative basis. Emerging markets peaked on the first day of the year and have been trading lower for
6 months, both on an absolute basis and relative to S&Ps as shown by the chart below.
iShares BRICs MSCI Index ETF ( BKF )
BRIC, is the title of an association of emerging national economies including: Brazil, Russia, India, China.
With the possible exception of Russia, the BRICS members are all developing or newly industrialised countries, but they are distinguished by their large, fast-growing economies and significant influence on regional and global affairs.
As of 2013, the four BRIC countries represent almost 3 billion people, with a combined nominal GDP of US$14.9 trillion, and an estimated US$4 trillion in combined foreign reserves.
iShares BRICs MSCI Index ETF ( BKF ) ( Candle / Left Scale )
SP500 Index ( Bar / Right Scale )