Are the BRICs a contrarian play now?
Brazil, Russia, India and China are the future. The BRICs are set to outpace the declining West for years. They have a gritty work ethic, low social spending, minimal debts, vast cash reserves and demographics to die for. They also routinely post double-digit GDP growth, while the UK can't manage a single positive digit.
If you invest in them, they will make you rich.
I know this, because fund managers and independent financial advisors (IFAs) tell me almost every day. But there is one thing they don't like to mention. Recent performance has been dreadful.
Over the last five years, China's Shanghai Schenzhen CSI 300 index has fallen -9.2%, in local currency terms. Over three years, it is down -28%.
The Brazil Bovespa index has returned a meagre 2% over both three and five years. The Russian Micex index is down -15% over five years -- although, to be fair, it is up 18% over the past three.
India has done better. Its BSE-500 index is up 13% over three years and 17% over five years. But it is also down 30% over the past 12 months -- and still falling.
Same old story
Clearly, investors should beware falling BRICs. Actually, they should have been donning their hard hats several years ago. You won't be surprised to hear that the BRICs started falling at exactly the same time that IFAs discovered the emerging market growth story and asset managers deluged us with me-too funds.
Once again, the smart money had been made before the masses moved in.
The only surprise was that it also happened to fund management legend Anthony Bolton, who I thought knew better.
New world blues
You can't pin these sharp falls on the BRICs, of course. The financial crisis was to blame. When indebted Western consumers stopped mainlining cheap emerging market imports, their export-led economic models ran out of juice. Yes, domestic consumption is rising, but not fast enough to make up the shortfall.
It was always an unhealthy relationship, lending the profligate West the money to buy their imports. And it is over.
Remember all that talk about emerging market decoupling? Nobody mentions it now. The old world appears to have sunk the emerging world as well. So what happens next?
They've got it all
True to form, most fund managers remain upbeat. "Compelling valuations and positive earnings forecasts point to potentially strong returns in BRIC markets in 2012," according to a report I received from HSBC Asset Management on Thursday.
"Compelling fundamentals… 2.7 billion people and rising... rich in mineral reserves... rising affluence and domestic consumption.... less dependent on the developed world."
You know the story.
The point is, there are two stories here. The growth story, and the investment return story. Most people know the growth story. The investment story is a tale rarely told.
GDP growth doesn't equal stock market growth. Fund managers don't tell you that, which is why many of their customers have been caught in the emerging market growth trap.
People who visit China are astonished by what they see, and mock the doomsayers. Even if they are right, that doesn't mean investors will cash in, especially since the major companies are run for the benefit of the Chinese government rather than minority overseas shareholders.
Cheap as BRICs?
I've held three specialist emerging markets investment trusts for years -- Baring Emerging Europe (LSE: BEE), Scottish Oriental Smaller Companies (LSE: SST) and BlackRock Latin American (LSE: BRLA) -- and one unit trust, Jupiter India. I used to boast how they had doubled or tripled money, but I have less to boast about now.
Of course, you can use poor investment data in two ways: as a threat, or an opportunity. There is certainly a contrarian case for investing in the BRICs. They look cheap right now. Russia is trading at a price-to-earnings ratio of 5 times earnings. Brazil trades at 10 times, China at 11 times and even once-crazily expensive India is close to sanity at 16 times.
If the beleagured West does fire another volley of quantitative easing, much of that will find its way into emerging markets.
Long journey back
I've noticed that after a hot investment theme starts to cool, people continue to believe in it for several years. Once the bubble has burst, it takes years before the market starts moving again. Technology took a decade. It looks like banking stocks will, too.
Then bear in mind that the Chinese property bubble has barely even begun to deflate. Brazilian GDP grew just 2.7% last year. Russia is hopelessly corrupt. India is a budgetary shambles.
No wonder the BRICs are resorting to fiscal and monetary stimulus -- they are as hooked on the stuff as we are. It may work. But it wasn't supposed to be this way.
Shock plot twist
The BRICs were the future -- once. Over the last three years, far more money has been made in washed-up Western markets. The FTSE 100 is up 33%, while the US S&P 500 is up 47%.
Which isn't the story most people were expecting.
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> Harvey holds Baring Emerging Europe, BlackRock Latin American, Scottish Oriental Smaller Companies and Jupiter India.