The stock markets around the globe are in a tizzy, sensitivity levels are high, resulting in investors reacting to every piece of news. There is lack of direction as some questions remain unanswered: where is crude oil heading, how exposed are the banks to the energy sector, is China really slowing, and many more. However, amid all the chaos, there lies an opportunity to slowly pick stocks and funds which looked too expensive until recently and are now available on discount.
As investors look around, some may want to consider BRIC countries. The popular acronym was coined by Jim O’Neill in 2001, which identified Brazil, Russia, India and China as economies which would be a major force in the world economy by 2050. The dynamism in the financial world doesn’t allow things to be the same forever, as economic and commodity cycles play their part and disrupt the patterns of growth. While similar disruptions have struck the original BRIC economies, we analyze if they offer some value in the present times.
Brazil, the largest economy in Latin America and the seventh in the world, is trapped in recession, struggling with multiple problems. Brazil grew at an average pace of 4.5% during 2006-10, moderating to 2.8% over 2011-13, and dropping to 0.1% in 2014. Brazil’s economic problems triggered by falling commodity prices coupled with corruption and political uncertainty, have damaged the investment atmosphere and confidence in the economy. With lack of reforms, stubbornly high inflation and interest rates, the economic contraction experienced in 2015 will continue in 2016 before 2017 brings sound rebound as per IMF.
While the Brazilian economy is weighted down with compounded factors, it still offers some good stocks and exchange traded funds to investors. Some companies that trade as American Depository Receipts on U.S. bourses are:
- Ambev S.A. (ABEV)
- Itau Unibanco Holding (ITUB)
- Banco Bradesco (BBD) Finance
- Vale S.A. (VALE)
- Telefonica Brasil (VIV)
- Ultrapar Participacoes (UGP)
- TIM Participacoes (TSU)
Some ETFs tracking the Brazilian stock markets:
- iShares MSCI Brazil Capped ETF (EWZ)
- Global X Brazil Mid Cap ETF (BRAZ)
- Deutsche X-Trackers MSCI Brazil Hedged Equity ETF (DBBR)
- ProShares UltraShort MSCI Brazil Capped ETF (BZQ)
- Market Vectors Brazil Small-Cap ETF (BRF)
The Brazilian stock markets, represented by the Ibovespa Brasil Sao Paulo Stock Exchange Index, fell by 13.31% in 2015 and are down by 3.37% year-to-date in 2016. While the individual performance of stocks and ETFs hasn’t been bad, investors need to tread cautiously in these markets, given the economic chaos within and outside Brazil.
Russia is no better, its economy has been deeply impacted by the tumbling oil prices, with the situation deteriorating amid western sanctions following the annexation of Crimea. The economy evaded contraction in 2014 with a 0.6% growth but 2015 hammered it down further, resulting in a contract of 3.7%. IMF projects its economy to contract by 1% in 2016, before growing by around 1% next year.
The Russian stock markets fell by a huge 43% in 2014 made its valuations attractive and investors looked to embrace the stocks in 2015, helping the markets to restrict the fall to 4.26% during the year. The Russian markets are down by 1.52% year-to-date in 2016. While some of biggest energy sector and defense sector companies belong to Russia, most stocks trade in U.S. over-the-counter. Few stocks like Mechel OAO (MTL) and Mobile TeleSystems OJSC (MBT) are available on prominent U.S. stock exchanges. Some of the popular ETFs with Russian exposure are:
- Market Vectors TR Russia ETF (RSX)
- SPDR S&P Russia ETF (RBL)
- iShares MSCI Russia Capped ETF (ERUS)
- Market Vectors Russia Small-Cap ETF (RSXJ)
While the Russian markets are trading at a discount, they are for investors with high risk appetite and experience, given the unpredictability in the geopolitical scenario and economic conditions.
India is often referred to as the “sweet spot” amid a scenario of global economic turmoil, but the speed at which its stock markets fallen since their peak in 2015 has rattled investors. While some factors at home, like delay in reforms and passing of essential bills in the parliament, has affected investors’ confidence, its mainly the global market woes which have spoiled the party. The markets have been tracking the global cues in an amplified way, causing Sensex to fall by over 11% year-to-date following a robust 29.89% rise in 2014 and a fall by 4.87% in 2015.
Given the intactness of India's broader economic parameters, this is a buying opportunity for investors. The factors which favor India are its domestic consumption, less dependence on commodity prices and China’s slowdown vis-à-vis others, initiatives like “Make in India” by the Modi-led government, predictions of robust growth by IMF (7.5% in 2016 and 2017), its status as a preferred foreign direct investment destination, and political stability.
Some of the best Indian companies’ trade in the U.S. as ADRs which can be considered by investors or they can access the Indian markets via exchange traded funds. The popular ETFs are:
- PowerShares India Portfolio (PIN)
- Market Vectors India Small-Cap Fund (SCIF)
- EGShares India Consumer ETF (INCO)
- EGShares India Infrastructure Index Fund (INXX)
- S&P India Nifty Fifty Index Fund (INDY)
- India Earnings Fund (EPI)
Still, these funds have fallen in the range of 10%-20% year-to-date.
Historically, the Indian markets are quick to bounce back when the sentiments turn positive. While that happens, investors should make use of the opportunity provided by an amplified negative reaction to diversify outside the home markets.
It won’t be wrong to blame the melt-up and melt-down in China’s stock markets as a major part of the turmoil in the financial markets around the globe. The anxiety caused by the free-fall in the Chinese markets was accentuated by the fear of slowdown in the Chinese economy, suspected manipulations with yuan and less transparency, creating a snowball effect.
China reported the slowest growth in 25 years as its economy grew by 6.9% during 2015. The Chinese economy is projected to grow at 6.3% in 2016 and by 6.0% in the subsequent year by IMF. The Chinese economy is going through a transition, adjusting to a more sustainable growth level for the times to come. Despite current issues, the outlook for China remains positive.
The Chinese stock markets had a fantastic 2014, rising 52.87% followed by chaotic 2015, ending up in a 9.41% rise for the year. The Shanghai stock market index is down by almost 22% year-to-date. The current market fall has made these markets more attractive but investors should advance with caution towards mainland.
The safest bet is to select fundamentally good stocks trading on U.S. exchanges as ADRs or add a flavor of exchange traded funds providing a gateway to mainland. Some of the popular stocks from mainland trading as ADRs are:
- Alibaba Group Holdings Limited (BABA)
- Baidu, Inc. (BIDU)
- Tencent Holdings Limited (TCEHY)
- NetEase, Inc. (NTES)
While some the popular ETFs are:
- iShares China Large-Cap ETF (FXI)
- iShares MSCI China ETF (MCHI)
- SPDR S&P China ETF (GXC)
- Global X China Consumer ETF (CHIQ)
- Market Vectors China AMC A-Share ETF (PEK)
- Global X China Financial ETF (CHIX)
Stock markets continue to be volatile, thanks to news particularly related to oil, China and banking sector. In such a challenging and dynamic market situation, investors need to hold their nerves, contain fear and take advantage of any opportunity that presents itself. However, don’t rush, because the discount sale is likely to last a bit longer, be selective and add quality stocks and funds to your shopping bag in a gradual manner.