Why I Am Not Bullish on The BRICs

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Nowadays, many people seem to be bullish on the BRICs (Brazil, Russia, India, China). The bulls expect these countries to experience rapid growth in the future and therefore argue that their equities should be purchased. But how much growth can we expect, and what is the macro picture like in these countries? Let us examine each country one by one.

Brazil: The country experienced a massive economic crisis only eleven years ago. Has so much changed then, and is this time different? Bulls will argue that Brazil is the eighth largest economy in the world, but it was also the eighth largest economy in 1999 when it devalued its currency.

There are also signs the economy is overheating. Brown Brothers Harriman’s Win Thin wrote recently:

Some of the numbers are deteriorating sharply for Brazil, including the external accounts, and should help limit BRL upside. Exports remain robust, but imports are going through the roof and leading to worsening trade and current account balances. June current account gap was reported at a much higher than expected -$5.2 bln, and pushed the 12-month total to -$40.9 bln or -2.1% of GDP, the highest since Oct. 2002. FDI flows have held up OK, but now only covers less than two thirds of the current account gap.

Russia: To state Russia has massive demographic problems would be an understatement. The population peaked in 1991 and has been declining ever since. The UN expects the population of Russia to decline as much as a third by 2050. In addition, Muslims are a growing percentage of the Russian population this will likely cause increasing social tensions. Russia is run by corrupt politicians and robber barons, and there are poor protections for investors rights. Russia also had its own economic crisis in 1998, when it defaulted on its debt. Now the Government is even more authoritarian and there is no way to predict if the Government would just default as it did in the past.


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