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Portfolio > Economy & Markets

BRIC Countries Contend With Challenges

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India’s less-than-expected second quarter growth figure was disappointing news and its fellow BRIC countries—Brazil, Russia and China—are also facing challenges. What’s in store?  The investors weigh in.

Brazil: Political Risk Rising

That Brazilians are so actively clamoring for the impeachment of unpopular President Dilma Roussef could perhaps prove to be a positive development for the beleaguered country in the longer term.

“You could look at it from the standpoint that Brazilians are standing up against corruption and want a government that really represents them,” said ReKeithen Miller, portfolio manager at Palisades Hudson. “In a democracy, there will always be growing pains and people standing in the street and letting their voices be heard is a positive development.”

Support for Rousseff, who won the last presidential election by a sliver, has plummeted according to recent polls. Brazil’s economy is in terrible shape, with inflation skirting close to 10%, its woes compounded by China’s slowdown and the fall in commodity prices.

“It is a positive that Brazil’s institutions are getting stronger and can investigate politicians, but looking toward the future, with policymakers no longer going along with the government’s decisions, the perception of political risk in Brazil is rising a lot more than we anticipated,” said Ben Rozin, portfolio manager at Manning & Napier. “That changes the amount of optimism we can have on the future growth story.”

Market View: “Brazil is cheap, you could make a case for buying it based on value, but it will be a rocky ride,” said Charles Sizemore, CIO of Sizemore Capital Management. “Brazil is in for a prolonged period of choppy instability, so you could say Brazil is a speculative buy based on value, but it won’t be a smooth ride.”

Russia: Status Quo and Stagnation

Investors such as Miller and Rozin have stayed away from Russia on account of the absence of the rule of law, the shabby treatment of minority shareholders and foreign investors and the ongoing geopolitical tensions between Russia and the west.

The commodity price decline hit Russia hard and China’s slowdown has added fresh cause for concern, said Stuart Quint, senior investment manager at Brinker Capital, since Russia has been hoping for investment from China. Quint some level of stagnation for the Russian economy, based on lower commodity prices and also because some companies are starting to cut down on production and even closing down plants. Oil giant Gazprom is even postponing or canceling some of its bigger pipeline projects.

“More importantly, real incomes have gone down for the Russian population by a third because of the ruble decline and any increase in wages to compensate hasn’t happened,” Quint said.

Market View: Russia is oil and oil is Russia – there’s no way to disentangle them, so if you’re buying Russian stocks, you’re doing it for short-term swings,” Sizemore said. “If you’re taking a long term position, you’re taking a view that oil and gas prices will recover or stabilize here.” India: Short Term Blip

Investors are most disappointed by the pace of reforms in India. In fact, many view stagnation in the reform process as the greatest impediment to economic growth. Still, India is the greatest beneficiary of the fall in commodity prices, Rozin said.

“Inflation has come down and they have created some room to cut rates and give the economy some stimulus,” he said. “The trade and current account numbers look good so these are all positives and India still appears to be a safe port in the storm, even though the story hasn’t progressed as optimistically as we would have hoped.”

Market View: “We think India is a good place to be in the longer-term,” Miller said. “It’s the third largest economy in Asia and has much room for growth.”

China: Slower Growth, New Reality

What’s happening in China now may well be its dreaded hard landing, which intentionally or not, impacts most of the world. But Rozin is more nuanced in his views.

“Most of the work I have done on China shows them ramping up the economy,” he said, “but the new realization is that China will grow slower and though the story has taken a hit in credibility, most people will have to realize that China is not going to grow above 8%.”

Market View: “The rise of the Chinese middle class and the consumer economy are macro trends that won’t reverse,” Sizemore said. “You may not want to get into the market now, but I would say that at some point, like all bear markets, there will be no one left to sell and the market will rise.”


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