It's hard to keep the BRICs down.
Earlier this year, Brazil, Russia, India, China and other emerging markets struggled to get rolling. Worries about inflation, flaring unrest across the Middle East and North Africa (MENA) and the Japanese earthquake all conspired to drive investors into the warm, friendly clutches of developed markets.
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But as Japan has faded from the headlines and the MENA crises have come off the boil, the BRICs have staged a strong comeback. HSBC recently upgraded its view of China to overweight from neutral, raised India to neutral and maintained an overweight view of Brazil. It is neutral on Russia.
Back in late March, EPFR, a fund tracker, reported that emerging-market equity funds had gotten off to a terrible start this year, with $26.8 billion in outflows at the time as investors poured into developed market funds. The thinking at the time was seductively simple: with so much craziness in the world, the political risk of emerging markets didn't make sense.
Things have changed rapidly since then. EPFR reports that in the week ended April 20, emerging-market funds attracted more cash than developed markets, the second straight week that had happened. Emerging-market equity inflows have had positive inflows for four weeks now.
But even with inflows picking up, the market performance of the BRICs has been a bit muddled.
Brazil's Bovespa index is down 3.4% year-to-date and down 1.2% in the last month. India's Sensex has gained 4.7% so far this year, but has risen 3.9% in the last month alone. China's FTSE Xinhua 200 has increased 1.3% this year, though it dropped 1.4% in the last month. Russia's RTS is up 14.8% year-to-date, but off 0.5% in the last month. By comparison, the S&P 500 has gained 6.2% this year and 1.6% in the last month.
Despite the strong year so far in the U.S., here are five reasons the BRICs are coming back into favor.
S&P warning on U.S. debt. Critics opine that S&P is hardly in a position to pontificate about the U.S. debt picture. As Barry Ritholtz wrote recently : "If ever there was an organization more corrupt, incompetent, and less capable of issuing an intelligent analysis on debt than S&P, I am unaware of them."
Despite that harsh assessment, the S&P decision to revise the U.S. long-term debt outlook to negative from stable underscored a hard reality . The U.S. fiscal outlook is bleak and the political environment in Washington is not ripe for any long-term solutions.
While the U.S. stock market has recovered, doubts about the U.S. debt and deficit outlook have only risen. Gold and silver prices have soared to record levels in the wake of the S&P report and the dollar has weakened in dramatic fashion. If the U.S. faces problems, that makes the political risk in the BRICs and other emerging economies look less problematic.
The weaker dollar. The flailing greenback makes investments in overseas markets like the BRICs inherently more attractive for U.S. investors, since local market gains get a dollar kicker when they are brought back home.
And the dollar doesn't look likely to get stronger anytime soon. The U.S. Dollar Index clipped a three-year low this week and net short positions, as reported by the CFTC, show that speculators have their biggest bet against the dollar since 2007.
At a recent meeting, the BRIC countries once again called for an alternative reserve currency to the dollar and some BRICs have even pondered the creation of a BRIC currency. These are notions generally associated with ascendant countries.
European debt woes are back in focus. Across the pond, the Easter holiday momentarily put off the chatter of a Greek debt restructuring, but it's back big-time today. The euro-zone is dealing not just with Greece, but also with debt-addled Ireland and Portugal.
Across the zone, agitation at the various rescues is on the rise, especially in Germany, Austria and Finland. The recent Finnish election elevated a party, the True Finns, who don't want to see more Finnish cash flowing to the various rescues .
The problematic euro situation, like the S&P warning on the dollar, is one more reminder that the developed world is not free of political risk.
BRIC growth rates are surging. While the U.S. and Europe struggle to get their economies moving in the wake of the global financial crisis, the BRIC countries are motoring ahead, especially China and India. "The global financial crisis hit Asia hard," Deutsche Bank recently wrote. "But the recovery was swift. It took only five quarters to return the pre-crisis level of trade activity."
Deutsche's forecast for growth in 2011 for the BRICs: China 9.4%, India 8.2%, Russia 5.4% and Brazil 3.6%. As Brett Arends recently pointed out at our sibling site MarketWatch, the IMF forcecasts that China's economy will surpass the U.S. in real terms in 2016, which isn't that far away. As Brett argues, "Just 10 years ago, the U.S. economy was three times the size of China's."
Oil prices have risen. This mainly helps the "R" in the BRICs, and could actually create a headwind for the BIC countries. But Russia, slotted into the BRICs probably in order to make it sound better (CRIBs?), is nevertheless part of this agglomeration, and its economy is heavily geared to oil prices.
Goldman Sachs Asset Management Chairman Jim O'Neill, who coined the term BRICs, noted in a report this weekend that Russia is making positive policy noises that could help drive its economy. "I continue to think that Russia is probably the most attractively priced of the BRIC equity markets today, because it is both cheap and marginal policy developments are much more positive than most people recognize," O'Neill wrote.
Dave Kansas blogs at The Wall Street Journal's MarketBeat .
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