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Sept. 4, 2015, 10:43 a.m. EDT

How BRIC investing went bust

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About Nicholas A. Vardy, CFA

Nicholas A. Vardy is Chief Investment Officer at Global Guru Capital, a fee-only, SEC-registered investment-advisory firm where he manages money for high-net-worth clients. Vardy is also the editor of three investing and trading services at NicholasVardy.com. He appears regularly on the Fox Business Network and CNBC Asia, and is a highly-rated speaker at investment conferences around the globe.

Nicholas regularly contributes his market views on his company blog. You can also follow Nicholas on Twitter @NickVardy or email him at nvardy@globalgurucapital.com.

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By Nicholas A. Vardy, CFA

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The knock-on effects of the Chinese slowdown are particularly evident in Brazil. It turns out that Brazil's rise is just a commodity-linked bet on China. Brazil's exports to China tumbled by an astonishing 19% in the first seven months of this year. No wonder the economy is contracting. Economic growth in the second quarter came in worse than expected at minus 1.9%, with Brazil's economy contracting by a whopping 7.6% on annual basis. Meanwhile, inflation is nudging double digits. Plus, the government is cutting back on 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 recently, "Brazil mania has turned to Brazil nausea."

iShares MSCI Brazil Capped /zigman2/quotes/208893627/composite EWZ -3.08%  has fallen 28.73% over the past three months.


Senator John McCain once dismissed Russia as "a gas station masquerading as country." Over the past 18 months, the Russian economy 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.

That said, Market Vectors Russia ETF /zigman2/quotes/200464876/composite RSX 0.00%  has fallen 17.25% in the past three months.


India has long suffered in the shadow of China, its economy held back by the messy politics of a democracy, lousy infrastructure, and ever-rampant corruption. No wonder Indian officials are now gloating over the Chinese economy's well-publicized stumbles.

That's largely because for the first time in recent memory, India's GDP growth is set to exceed that of China in 2015, (7.7% vs. 6.9%.) And even that's assuming you accept China's seriously fuzzy economic statistics.

That said, some critics are equally suspect of India's projections dismissing them 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.

The WisdomTree India Earnings ETF /zigman2/quotes/200018626/composite EPI -2.52%  has fallen 11.17% over the past three months.

No “Cheery Consensus” for the BRICs

As Warren Buffett has noted, "markets pay dearly for a cheery consensus."

And the current consensus surrounding BRICs is anything but cheery.

Nor is the outlook much better. Growth in emerging markets is slowing with a projected growth rate of 3.6% in 2015. That's the lowest level since 2001, excluding the crisis year of 2009. And if China's growth is closer to 4%, as many suspect, that emerging-markets growth number withers to 2.7%.

Yes, the BRICs are now hated and relatively cheap.

But you've got to be a dyed-in-the-wool contrarian to bet on the near-term prospects of the BRICs anytime soon.

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