Has the BRICs phenomenon become a fad?

Jan 22, 2011

In this issue:
» Wipro is falling behind TCS and Infosys
» Siegel believes that US stocks are attractive
» Greenspan vouches for the Gold Standard
» Will oil go to US$ 200 a barrel?
» ...and more!!

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There was a lot of buzz back in 2001 when Goldman released their famous report on Brazil, Russia, India and China. The report coined these countries as 'BRICS'. And went on to state how the economies of these four emerging nations would become bigger than those of the developed countries of the US and Europe by 2030 led by sheer pace of growth. Since then, emerging countries, particularly BRICS, have been growing at a furious pace. Even though the global financial crisis tempered growth somewhat, they nevertheless recovered quickly and have once again begun to display stellar growth in GDP.

But here comes the tricky part. Has the term 'BRIC' become a fad? Just because BRIC countries have been growing at a brisk pace, should investors club these countries as one asset class and pour money into them in droves? That is what seems to have happened until now. The kind of money that foreign investors have put into emerging markets has swelled so much that the valuations have run way ahead of fundamentals. Already fears have started emanating of asset bubbles being formed there. Plus inflation and tightening monetary measures have raised a question mark on whether growth would be sustained in the medium term at least.

Indeed, we agree that many of the BRIC nations have quite a lot of similarities. That said, there are certain factors that are unique to those countries alone. Thus, investments in these countries have to be done on the basis of evaluation of the economic scenario and corporate fundamentals of each country. Certainly not all taken together. Second, growth cannot form the only basis for making investments. Valuations and price levels have to be given their due consideration. Otherwise we are bound to have bubbles followed by crashes. That is why, investors in India should be wary of the 'themes' that have caught the fancy of foreign investors. Certainly, they should not get lured into investing in stocks solely on the basis of what the latter are doing.

Do you think BRICs phenomenon has become a fad? Share your views with us or post comments on our Facebook page.

 Chart of the day
Today's chart of the day shows that not much FDI came into India in 2010. Part of the reason was attributed to the bleak conditions in the US and Europe as a result of which not many corporates were willing to invest here. But bigger issues such as red tape and land acquisition problems have also discouraged potential investors in the past. For its part, the Indian government aims to attract a whopping US$ 250 bn in FDI into the economy in the next five years. It is considering opening up the gates for FDI in sectors like multi-brand retail and defense. Whether this will become a reality remains to be seen.

Data Source: The Economist

"We're having sleepless nights!" This seems like a statement coming from a despondent person facing a host of challenges in his life. In the business world, this kind of a stamen can be expected from a person whose company is facing troubled times. But when it comes from someone whose company commands a leading position in its industry, we must take notice.

We are talking about Wipro and its chief Azim Premji. After announcing Wipro's 3QFY11 results yesterday, he confessed that his company is falling behind its rivals TCS and Infosys. "We are having sleepless nights because we are not racing ahead," he is supposed to have said. Notably, the company has fired its two joint CEOs and has appointed someone who has been an old hand at the company. "I think it sends a strong signal that we are gearing up for the next stage of growth and profitability. We have fallen behind in the past few months and now have to start exceeding expectations," is what Premji had to say on this.

Wipro has indeed lagged behind its two bigger peers who have outpaced the company not just in terms of growth, but also on the profitability front. It will thus be interesting to see how the company settles the score over the next five years, as its chief is committing himself on.

You may like to believe that come what may, foreign investors will continue to pour money into Indian equities. However, if one of the most trusted minds in international equities is to be believed, the reality could be very different. Wharton professor Jeremy Siegel is of the opinion that the bounce back in corporate earnings in the US is quite underestimated. He goes on to call it 'the biggest bounce back from a recession ever'. Siegel is of the opinion that investors earning zero interest on trillions of dollars may be lured to US equities. This is despite the problems that the American economy is currently facing. So assuming that valuations for emerging market equities will continue to soar may not be very safe. For investors may find better deals back home. Especially, because the emerging economies are now dealing with their own set of problems. We believe that Siegel will be proven right sooner or later.

We don't expect much sanity from the western central bankers. This is after seeing how they have behaved over the past many years, in bringing their countries to such despairing situations. Talk about the US Fed, which under the aegis of its former chairman Alan Greenspan did not bother to put brakes on the hot money going out of its coffers and fuelling a housing boom. We all know how it ended.

But what seems interesting now is that those very people, who perpetrated this boom-bust situation, are trying to talk the other way. They are trying to sound intelligent and rational, something that they should have been when the fire was still being lit up. Alan Greenspan is at the forefront of all this.

This is what he recently told an international news channel, "We have at this particular stage a fiat money which is essentially money printed by a government and it's usually a central bank which is authorized to do so. Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that all of history suggest that inflation will take hold with very deleterious effects on economic activity."

Alan Greenspan talking about monetary restrictions and Gold standard? There's a great mismatch here!

The outspoken commodities guru Jim Rogers has come up with yet another prediction of oil prices. This time, however, we believe that he has gone a little too far with an estimate of US$ 200 a barrel. The bases of his estimate are limited reserves, constrained supply quotas and high demand for energy sources.

While we agree that oil prices will only go up from here, US$200 seems to be too high a mark in the near term. Our logic is simple. We believe that any spike in crude prices above US$ 100 will drag down the recovery and will make oil demand more elastic to prices. Also, we need to note that the recent surge of oil prices to US$100 a barrel was on back of a strong seasonal demand due to severe winters in US and Europe. It was further aided by one-time factors like shut down of oil pipelines. Such factors will not continue for long. And then with crude surging past US$100, OPEC will be under pressure to ease supplies, making US$ 200 for oil a rare occurence in the near future at least.

Most of the key global stock markets ended the past week on a negative note. Asian markets were amongst the top underperformers with China, Japan, Singapore and Hong Kong ending with weekly losses of about 2% to 3%. Losses in these regions were mainly over concerns of monetary tightening measures in order to prevent the economies (especially China) from overheating.

As for the other markets, Brazil and UK were amongst the top underperformers with losses of about 2% to 2.5%, while France and US ended with weekly gains of about 1% each. India's benchmark index, the BSE-Sensex was amongst the top gainers this week, ending higher by 0.8%.

Data Source: Yahoo Finance, Kitco

 Weekend investing mantra
"The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price." - Warren Buffett

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9 Responses to "Has the BRICs phenomenon become a fad?"

Manoj Kumar

Jan 24, 2011

It indeed has become a fad in the sense that these four are not the only countries growing in the range of 7% to 12%. Now there are many an African countries as well. It is in fact whole of the old world.


Sanjay Kumar Tiwary

Jan 23, 2011

Being a recent subscriber it would be too early to comment any thing on EQUITY MASTER.But ,i am extremely happy to see such a scientific & logical analysis which helps an investor to invest with confidence.



Jan 23, 2011

I think they are following a sort of "Top-Down-Approach" which generalizes the opportunity. Under these circumstances asset bubbles are likely to form. Intelligent investors must not get into the so called "Irrational Exuberance" by constantly brushing up the memories of the past.


Biji Thomas

Jan 23, 2011

Out of the BRIC countries only India and China are really performing. But Even they have their own set of problems. There is severe liquidity problems in Chinese markets and also governement restriction are forcing away many investors. In India too the equities are overvalued and remain directionless in the abscence of FII's


Krishan Chander

Jan 23, 2011

We are having laws which are very contradictory. Unless these contradictions are resolved the direction of progress is unpredictable. People have to pressurise the Govt to resolve these contradictions. Some independent thinking persons have taken up the issue, but this will only become possible if people rise against these laws as they forced the Govt at the time of Emergency in 1977.


Adi Daruwalla

Jan 23, 2011

This is connection with we are having sleepless nights by Azim Premji and a host of articles that appeared with the results of Wipro in TOI, DNAIndia and Hindustan Times
Article in HT Your article on page 11 of todays epaper and newspaper, Padma Awards "Govt servants not be considered this year." I also think that Azim Premji should not be considered for Industialist award as he has failed as two staffers have comitted suicide at Wipro. The reasons are obvious, corruption. There has been no findings as to who was responsible for those deaths within the organization or was it policies. In the given light what is foundation on which he is being called an industrialist, where is the moral fibre he so strongly advocates?
Also the other articles on page 16, "Wipro logs 10% net rise goes for rejig" co-CEO's lose jobs and company trails peers yet again. It is quite fair for what has happened at Wipro, action, execution and implementation are a must. Taking vital and crucial decisions are also a must and they must be right. What has happened here is that while Premji is right in knocking off Vaswani and Paranjpe his joint CEO's he has jumped from the frying pan into fire by appointing Kurien as the CEO of the IT business. While there is great feeling of euphoria from ex employees like Jesse Paul, little does she know that faking and fixing clients will not hold Wipro in good stead in the long run. Also while big clients were maintained in the last 6 - 7 year run up from USA, Kurien has kept clients happy while not uplifting Wipro's pricing to maintain the local workforce. In the years 2007 - 2010 the incremetal charge for airline projects at the BPO managed by Kurien was a meagre 0.86% YOY or 3% over 3 years. No doubt attrition is high. Being dynamic is one thing and being straight is one thing but in reality you have to be Dynamic, straight and correct in all your corporate actions and decisisons. Sustain the India growth story dont become a licker for clients. Also the product mix like CFO Senapathy has stated was in bad shape, Wipro had less of BFSI and Healthcare and more of the other stuff, telecom and technology. Also the geographic mix was lacking. Wipro forgot about Europe, and the Middle East market but focussed heavily on USA and also ignored the domestic growth story. Sorry but Premji has jumped from the frying pan into the fire; basically for a lack of choice to put someone at the helm of what can be a Power growth and prosperity story for India that is WIPRO.


siddappaji T S

Jan 22, 2011

what about stock the market short term investment which stock enter please and nifty restistant


Anupam Garg

Jan 22, 2011

Kindly guide as to which other nation is posting growth rate close to BRICS? the growth story of BRICS is here to stay


jagdish sanghvi

Jan 22, 2011

I believe so. Any kind of problem, criticism and weakness of the country or the economy is finally ended with a comment, "The long term growth prospects of India are intact". This is true of any joe-blow analyst or slightly higher bosses of the so called #1,2,3 brokerage houses.They have a vested interest. It almost seems certain that we are afraid to admit that things are going from bad to worse. A day may not be far when people(Indians and foreigners) will drop Indian stocks like hot potatoes.
Unless governance standards improve drastically and corruption is rooted out, I dont see how relevent is the letter "I" in BRICs. It is like some one telling me to invest in some of the lawless countries of south america. Would you?? I wont.

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