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How The BRICs Came Down To Earth
The popularity of the acronym “BRICs” – which stands for the fast-growth economies of Brazil, Russia, India and China – spread like wildfire in the post-financial-crisis world. Coined by ex-Goldman Sachs economist Jim O’Neill in 2003, the BRICs came to symbolize the shift in global economic power away from the developed G7 economies and toward the developing world. Not so long ago, the rise of the BRICs seemed inevitable. After all, together, the BRICs encompass more than 25% of the world’s land mass and 40% of the world’s population. And the combined Gross Domestic Product (GDP) of the BRICs exceeds that of the United States. And if you adjust for Purchasing Power Parity, together, the BRICs already account for 52% of the planet’s GDP. In 2010, Standard Chartered Bank predicted China would overtake the United States to become the world’s largest economy by 2020. And China’s economy would be twice as large as the United States’ by 2030 and account for 24% of global GDP. U.S. jobs were migrating to Indian outsourcers. Brazil was finally set to take its place among the world’s great economic powers, with its economy having overtaken the United Kingdom’s in size. No wonder that investors poured money into the BRICs stock markets in the expectation that their profits would echo the rise to global prominence of these newly dominant economies. Alas, things did not quite turn out that way. BRIC Investing Gone Bust After the financial meltdown of 2008, many investors favored BRICs over stagnant, old-world economies like the United States. Yet things turned out differently. Even as U.S. markets still trade within striking distance of their all-time highs, the MSCI BRIC Index now languishes 48% below its 2007 peak. No wonder BRIC investors are pulling in their horns. Below is a quick look at how BRIC investors in the United States have fared in the recent market turmoil. I. China – Deutsche X-trackers Harvest CSI300 CHN A (NYSEARCA: ASHR ) The Chinese stock market has been in the headlines often of late, collapsing pretty much as I had predicted in early June . The latest news is that the Chinese government has thrown in the towel on supporting the stock market in a $200 billion spending spree funded by the central bank, local brokerages and commercial banks. Attention has shifted to Chinese journalists, who now are “confessing” to writing stories that stoke panic in the markets. In the meantime, bad loans at China’s banks have soared, with ICBC’s book of bad loans soaring by 28% last quarter alone. And the banking sector is often the canary in the coal mine about more bad things to come. In any case, the “this time it’s different” conviction that seemed to undergird China’s dominance in the world has waned along with the size of investors’ portfolios in the Chinese markets. Deutsche X-trackers Harvest CSI300 CHN A has fallen 35.88% over the past three months. (click to enlarge) II. Brazil – iShares MSCI Brazil Capped (NYSEARCA: EWZ ) The knock-on effects of the Chinese slowdown are particularly evident in Brazil, as its commodity bet on China has turned sour. Brazil’s exports to China tumbled by an astonishing 19% in the first seven months of this year. Economic growth in Q2 came in worse than expected at minus 1.9%. Put another way, on an annual basis, Brazil’s economy contracted by a whopping 7.2%. Inflation is nudging double digits. The government is cutting back spending, exacerbating the contraction. Wealthy Brazilians are abandoning ship, snapping up properties in southern Florida. As one commentator put it in the Wall Street Journal , “Brazil mania has turned to Brazil nausea.” iShares MSCI Brazil Capped has fallen 21.46% over the past three months. (click to enlarge) III. Russia – Market Vectors Russia ETF (NYSEARCA: RSX ) Senator John McCain once dismissed Russia as “a gas station with a country attached.” Over the past 18 months, Russia has been hammered by the oil price and the costs of its increasing economic isolation and political adventurism. At the same time, Russia is a value investor’s dream: it is both hated and cheap. In fact, Russia is the second-cheapest market in the world on a long-term cyclically adjusted price earnings (“CAPE”) basis. Trading at a price-to-earnings (P/E) ratio of about 4.8, and a price-to-book ratio of 0.7, the Russian market trades at about half of the level of the broader MSCI Emerging Markets Index. Gazprom, the world’s largest natural gas producer, trades at a P/E ratio of 5. Here’s the biggest surprise. Despite the pullback in recent months, Russia is up 14.97% for 2015. That makes it the third-best-performing market of 2015 among the 47 markets I track at my firm, Global Guru Capital. NOTE: Global Guru Capital is a Securities and Exchange Commission-registered investment adviser and is not affiliated with Eagle Financial Publications. Market Vectors Russia ETF has fallen 11.24% in the past three months. (click to enlarge) IV. India – WisdomTree India Earnings ETF (NYSEARCA: EPI ) India has long suffered in the shadow of China. No wonder Indian officials are working hard not to gloat at the Chinese economy’s well-publicized stumbles. That’s largely because India’s GDP growth forecast for 2015 of 7.7% exceeds China’s estimated 6.9%. And that’s assuming you accept China’s seriously fuzzy economic statistics. That said, critics are equally suspect of India’s projections, which seem too good to be true. Most worrisome is that Prime Minister Modi’s reforms have bogged down in parliament, as investment in industry and infrastructure has ground to a halt. WisdomTree India Earnings ETF has fallen 11.29% over the past three months. (click to enlarge) No ‘Cheery Consensus’ For all the hoopla surrounding the BRICs, this highly fêted group has turned out to be a bust for investors making a one-way bet. Meanwhile, growth in emerging markets is only slowing. Projected growth of 3.6% in emerging markets in 2015 is the lowest since 2001, excluding the crisis year of 2009. And if China’s growth is actually 4%, and not 6.9%, that emerging markets growth number withers to 2.7%. About the only thing that the BRICs have going for them is that they have become among the most hated markets on Earth. And as Warren Buffett has noted, “markets pay dearly for a cheery consensus.” Certainly, the current sentiment surrounding the BRICs is anything but cheery.
Blanket Equity Coverage Through ETFs
Exchange Traded Funds are a liquid investing tool. Costs per 10,000 dollars index funds are extremely low. Portfolio construction will play the entire U.S. market, and a sweeping international option. Turbulence in the global equity markets has investors reviewing their portfolios. Retail investors subscribe to the belief that the best way to minimize losses is diversity and low fees. I’d like to review my personal holdings with you, as an option for investors seeking a diversified foundation of funds which all have low fees. I invest in the 5 ETFs, with minor overlap, and allocate 20% to each. Holding these index funds will allow you to have sweeping coverage of the U.S. market, including a broad international fund. Vanguard Total Stock Market ETF (NYSEARCA: VTI ) ” The Fund employs an indexing investment approach designed to track the performance of the CRSP US Total Market Index, which represents approximately 100% of the investable U.S. stock market and includes large-, mid-, small-, and micro-cap stocks regularly traded on the New York Stock Exchange and Nasdaq. The Fund invests by sampling the Index, meaning that it holds a broadly diversified collection of securities that, in the aggregate, approximates the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield.” Fee – .05% annually. VTI allows investors access to 3,816 stocks of all market caps, and has outperformed the S&P since 2005. Vanguard Small-Cap Growth ETF (NYSEARCA: VBK ) ” The Fund employs an indexing investment approach designed to track the performance of the CRSP US Small Cap Growth Index, a broadly diversified index of growth stocks of small U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index.” Fee – .09% annually. Hunting for news on small companies can be can be difficult. This fund gives investors access to this market through a basket of 738 small cap stocks. Vanguard Mid-Cap ETF (NYSEARCA: VO ) “The Fund employs an indexing investment approach designed to track the performance of the CRSP US Mid Cap Index, a broadly diversified index of stocks of mid-size U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index.” Fee – .09% annually. Reinforcing your base position in mid-caps through VTI, this is where the high flying stocks are located. The index again protects investors against massive losers, while benefiting from the high fliers. This fund has 369 stocks between 2-10 billion market cap in its portfolio. Vanguard Mega Cap Growth ETF (NYSEARCA: MGK ) ” The Fund employs an indexing investment approach designed to track the performance of the CRSP US Mega Cap Growth Index, which represents the growth companies, as determined by the index sponsor, of the CRSP US Mega Cap Index. The Index is a float-adjusted, market-capitalization-weighted index designed to measure equity market performance of mega-capitalization growth stocks in the United States. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index.” Fee – .11% annually. This fund has 150 stocks and contains the big blue chips over 200 billion in market cap. Vanguard Total International Stock ETF (NASDAQ: VXUS ) ” The Fund employs an indexing investment approach designed to track the performance of the FTSE Global All Cap ex US Index, a float-adjusted market-capitalization-weighted index designed to measure equity market performance of companies located in developed and emerging markets, excluding the United States. The Index includes approximately 5,550 stocks of companies located in 46 countries. As of October 31, 2014, the largest markets covered in the Index were Japan, the United Kingdom, Canada, Switzerland, and France (which made up approximately 16%, 15%, 7%, 6%, and 6%, respectively, of the Index’s market capitalization). The Fund invests all, or substantially all, of its assets in the common stocks included in its target index.” Fees – .14% annually. An all in one stop for your international exposure. This fund employs roughly 60% of its assets into industrialized nations, the rest into emerging markets. This portfolio construction will give investors sweeping coverage of the United States, and minor exposure into the international markets. If you’re rebalancing your portfolio, this may be a good place to start. From this portfolio, investors can begin adding individual stocks and sector based ETFs to compliment. Investors being hurt in these multiday declines should consider redesigning their portfolio construction. Begin with these ETFs, branch off slowly, and this recovery will be more than breaking even. Disclosure: I am/we are long MGK, VO, VTI, VXUS, VBK. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.