Reader Writes:
Do you have a view on whether the BRIC companies will still outperform over the coming years or is it time to take your profits?
BRIC stands for Brazil Russia India & China.
The story behind their potential success is that consumption in the east with China and India and their offering to the west would be colossal, and in some people’s view would take up the slack of any U.S. slowdown.
The further addition to that is the view that Brazil with its commodities, and Russia with its oil and gas would be a natural winner with rising demand.
Seems a nice connection! Much depends on belief as always in the ‘noise’. The markets have been full of noise since history.
It is the job of some to provide reasons to invest into funds as that’s what they are paid for. It is mine to decipher if there is any validity in it.
In February ’07 I first wrote on the subject and explained that they had potential, but the risks were also there i.e. commodities were also a bubble.
For the reasons I have recently covered, I believe the B & R of BRIC will now have a hard time. Much depends on the investment into commodities and that has shone through over the weeks since we first exposed who and what was driving inflation.
Much of the noise stated that supply and demand drove oil, which we pointed out was complete nonsense. We pointed out that supply was fine and demand was falling yet oil had increased from $90 to $147 over the last year.1 How can that make sense? Consumption of oil for example is down 130,000 barrels a day yet every person I know involved in selling oil and gas shares denies.2 Ok gentlemen, can you explain with the threats of hurricanes and the issues in Georgia and supposed increases in demand, why oil is now trading at $117, off a high on the 11th of July of $146.50. This is a 20% drop.
The reason, as pointed out in this column, is speculative investment. In 2003 the total amount invested in history in commodity index traded strategies was $13b. Five years later the number was $260 billion. If you were invested in these futures and caught when the market falls it would be very expensive indeed. My view was that the traders would bail out before this and that is what has happened. The effect on the prices of the underlying wheat, oil etc is that the price will come down sharply.
This makes Brazil and Russia unattractive and was the reason we sold out six months ago. Whilst many have tried to defend Russia’s story with P/E ratios, I don’t agree. A P/E ratio measures the ratio between the price of a company and its earnings. It makes the assumption that if you have a low P/E ratio that you have a good stock to invest into. This is crude. The E could get battered and as such is not a reliable measurement. In any event the political issues, apparent lack of concern by the Russians and overall unrest make the region as attractive as a politician.
Whilst it’s true that the better prices come when everyone else has flown and concern is at its greatest, sitting at the base of the launch burners of the space shuttle pre launch isn’t necessarily always going to give you a nice tan.
China and India have taken an absolute hiding over the last year but are different in that they do represent an upward demand no matter which way you look at them. It is perhaps a good time to be reconsidering them given the nature of their recent performance which has taken back some of their gains, but the risks are still there in terms of politics.
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