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Can BRIC Lay a Solid Foundation for the Future?

The BRIC in the Wall is Cracking: An Assessment

(Continued from Prior Part)

Cracks in the BRIC

In our view, the cracks in the BRIC (Brazil, Russia, India, and China) are there for all to see. If we consider equity market performance, the BRIC is split into two. Although Brazil and Russia had a great 1Q16, India and China have struggled. Brazilian equities have rocketed while Chinese equities have fallen sharply. The cracks are not limited to stocks—they are visible in the economies as well.

Economically, India (MINDX) looks to be the best placed among the BRIC nations. Inflation is under control, economic growth is expected to be healthy, and the fall in crude prices are a big help to the government’s finances. A slower rate normalization path by the Federal Reserve has led to foreign investors returning to Indian equities (TTM).

Peers

However, the other nations are facing several problems. Among them, China (FXI) seems to be the best placed as of now. Although its economy is not in good shape and capital outflows are worrisome, the situation is not critical. Given their political structure, they can pass through essential structural reforms without the worry of a different government undoing them. The seriousness of the economic situation has made Chinese authorities willing to take painful but vital steps toward a new growth path.

As of now, Russia (RSX) is not in that bad shape, either. Its equity markets are enjoying the rise in crude oil prices (LUKOY), which is helping the government’s finances as well. However, the nation faces risk from its strategic and political positions in various conflicts in Ukraine and Syria.

If crude maintains or moves above the $38–$40 per barrel mark, the nation should continue to benefit. However, a fall in prices may occur if Iran does not agree to reduce crude oil production, and its political stance may push the nation toward economic trouble.

Brazil (EWZ) is economically the worst placed among its BRIC peers. It’s hard to point out anything right with the country as of now, with the exception of the upcoming Olympic Games this summer. The potential impeachment of its president, Dilma Rousseff, has moved equities northward (BSBR) (ABEV), which is not sustainable.

What about your BRIC investments?

The graph above shows the geographic allocation to BRIC stocks by the Templeton BRIC Fund – Class A (TABRX), the iShares MSCI BRIC Index ETF (BKF), and the Guggenheim BRIC ETF (EEB). China and India are the top two choices for all funds except EEB.

For now, you can look at your assessment of these countries, compare it with our assessment, and form a strategy for these nations. We have outlined whether we believe a passive or an active strategy is beneficial for now. Taking into account the allocation to BRIC stocks by the aforementioned funds, you can formulate your own allocation to BRIC. A solid foundation can be expected, but it’ll take some time.

We’ll keep you posted about our top-down analysis on Market Realist’s mutual funds page.

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