BRIC Stocks on a 2012 Tear

BRICs are a solid investment, as we’ve seen so far this year, when their stock markets have outperformed almost everyone else. Odds are that they will continue to bring excellent returns, despite some headwinds.
 
It’s easy to see why. Brazil, Russia, India and China are where most economists see the highest growth rates in the next five to 10 years.  Yes, it is a very simple idea, but in 2012 to date, the indexes of those countries have delivered sterling returns.  
 
Russia’s index is ahead with a 21.4% gain year this year, Brazil 18%, India 11%, and China 10%.  If you equal-weighted each index, your composite return would be 15.1%, handily beating the global index’s showing by 5.1 percentage points. In the U.S., the Standard & Poor’s 500 index is up 9.5%.
 
The most obvious question investors should consider is: How will the rest of the year play out? 
 
Last year, global indexes started out in the same encouraging manner as 2012 has, only to wind up yielding heavy disappointment, especially in the BRIC and emerging market countries.  At some point, many of these indexes were down by more than 15%, some in the 20% to 30% range. 
 
A few questions investors should consider are: Will the European’s economies plunge? Europe is a major market for the BRICs. Will slower internal growth hobble them? What about inflation?
 
Most forecasts are for the four nations’ pell-mell economic growth to slow somewhat, although they still will handily outpace the West. The United States’ gross domestic product expanded by 3% last year. Europe appears to be on the verge of another recession, which means negative economic growth.
 
According to a study by PricewaterhouseCoopers, called Economic Views, China will remain the best growing BRIC, increasing 8.6% this year and 8.7% next. That’s a more moderate pace than in 2011, when it grew 9.2%, and 2010, 10.3%. Part of the problem is the Chinese government’s efforts to cool down an overheated property market. Beijing has imposed new rules, such as a limit on purchases and higher mortgage down payments. China’s inflation rate fell to 4.2% late last year from a peak 6.5% in July.
 
India also suffers from inflation, although PwC doesn’t expect it to hamper economic growth – which slowed to 7.3% last year from 8.7% in 2010. The firm believes things will pick up this year, to 7.5% and 8.1% in 2013. Manufacturing has dropped off, but electricity and services remain strong.
 
Russia, dependent on its oil and metals exports, has a big exposure to Europe, and that is taking a toll, PwC says. Growth will slip to 3.7% in 2012 from last year’s 4.3%. Right now, Russia is enjoying burgeoning oil prices, although those likely are temporary, given Europe’s slowdown. But Russia’s public is increasing consumption, suggesting that it is becoming more self-sustaining and less reliant on exports. PwC forecasts that its economy will re-accelerate to a 4.0% pace in 2013.
 
Brazil saw the biggest falloff in growth, to 2.9% last year from 7.5% in 2010. High interest rates to combat rising inflation and controls on foreign capital are chiefly to blame. Now, though, the Brazilian government has cut interest rates, relaxed a tax on foreign capital to attract more investment and launched a $526 billion stimulus program over four years. Given that, PwC expects growth to pop up to 3.3% in 2012 and 4.9% in 2013.
 
A common theme binds the BRICs: Their economies have robust outlooks, and should overcome any hindrances. Stocks are forward-looking things, and the optimism should continue to inspire them.
 
There are lots of questions about markets, and each investor has to consider them when investing both domestically and globally. 
 
Yale Bock, CFA, is the owner and operator of YH&C Investments in Las Vegas, Nev.
 
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