Will Brazil, Russia, India or China perform best this year?
2011 was a rotten year for the once-mighty BRICs. Stock markets in Brazil, Russia and China plunged 20% in the calendar year, while India fell around 30%.
2012 has been a different story, so far. Brazil and China are both up around 12% year-to-date. India and Russia are up 22%. The BRICs are still a risk-on trade.
Here's how the BRICs have performed over the last decade, on an annualised return basis.
BRICs and bones
|Country||Year-to-date||1 year||3 years||5 years||10 years|
Figures from MSCI.
The Brazilian economy grew 2.7% last year. That pales when set aside China's routine double-digit growth, but trounces the UK's 0.8% figure.
Brazil has been an investment-grade nation since 2008 and is now a bigger economy than the UK, worth £1.56 billion compared to £1.53 billion. Its central bank has also been accelerating interest rate cuts, pushing borrowing rates below 10%, which is cheap by local standards.
Low interest rates and looser global liquidity have driven stock market returns this year, while Brazil is also enjoying growth in domestic consumption.
Like many emerging markets, Brazil isn't as cheap as it was, especially for sterling investors. Its property market is showing signs of being overvalued. Brazil is also heavily dependent on the commodities boom. If China slips, it could pull down Brazil.
Low-risk, it isn't.
Investment sentiment can change fast, especially with emerging markets. One minute, China was an unstoppable global powerhouse that was driving the West into the dustbin of history -- the next, it was sitting on the mother of all property bubbles and doomed to grow old before it became rich.
So which is it?
Investors are getting jumpy about China, especially after Premier Wen Jiabao announced it was cutting its growth target to 7.5% this year. Yet this was only a light trimming of the previous 8% target, and China also has a habit of overshooting its targets.
But China does face a major challenges. Inflation is 5.4%, above its 4% target. Domestic consumption is sluggish. Western demand is slipping.
China's one-child policy could spark the world's biggest demographic crisis, as the population ages. Labour is already getting more expensive, persuading growing numbers of Western companies to "onshore" production back home. Oil at $125 a barrel isn't doing its manufacturers and exporters any favours.
And then there is the world's most-talked-about property bubble. As the West knows, overheated property markets are difficult to cool down. Can China succeed where the West failed?
After a dismal 2011, Indian stock markets have enjoyed a barnstorming 2012, rising 22%. But the country still has plenty of problems, including high inflation and a weak currency.
Investors hoping for more interest rate cuts to generate growth may be disappointed. It is still the most expensive thing BRICs, as judged by its price-to-earnings (P/E) ratio of 17.8, although that is down from more than 22 just a few months ago.
India is getting cheaper, but is it cheap enough? Not for me, not yet. Especially if energy costs remain high, as India is still so dependent on imports.
To be frank, there are only two reasons to invest in Russia (and countless reasons not to). But since those two reasons are oil and gas, it is a tempting destination.
Actually, there's a third reason. It's the cheapest BRIC, on a P/E of just 6.3.
BRICs P/E ratios
Like India, Russian share prices have soared this year. With oil trading at $125 a barrel, why wouldn't they? The recent oil price dip might shake investor confidence, and you may have missed this opportunity for now.
But this looks like being another volatile year, so you should get another chance. Don't miss it this time.
Pick of the BRICs
It's impossible to say which BRIC will fly this year. Russia's low P/E makes it look the most tempting, especially given the looming energy crisis.
But what strikes me from looking at the past performance figures is how the economies move in lockstep. Over 10 years, performance is very similar. Ditto over three years, one year and year-to-date.
Your best option may be to find out where you are underweight, and plug that gap in your portfolio. Although don't expect a return to the glory days of double-digit investor returns.
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