PermanentWealthinvestor.Com » Brazil http://www.permanentwealthinvestor.com Martin Hutchinson Mon, 23 Jan 2012 15:15:55 +0000 en hourly 1 http://wordpress.org/?v=3.3.1 The Headline You Never Expected: Foreign Growth Could Bail Out the U.S. Economy http://www.permanentwealthinvestor.com/archives/foreign-growth/ http://www.permanentwealthinvestor.com/archives/foreign-growth/#comments Fri, 13 Aug 2010 13:50:45 +0000 Martin Hutchinson http://www.permanentwealthinvestor.com/?p=7095 The Headline You Never Expected: Foreign Growth Could Bail Out the U.S. Economy During a period of increasingly worrisome headlines about the U.S. economy, there is one bright spot.

The rest of the world appears to be doing much better than we are.

In the long run, that’s good news for [...]]]>

Source MoneyMorning.com:
During a period of increasingly worrisome headlines about the U.S. economy, there is one bright spot.

The rest of the world appears to be doing much better than we are.

In the long run, that’s good news for the United States. Rapid world growth will eventually rekindle the economic fires here, producing a growth that is more balanced than the bubbles of 1995-2008.

Still, getting to that point will be a challenge, since – economically speaking – the home fires don’t appear to be burning all that brightly.

Trouble on the Home Front?

The U.S. recovery appears to have slowed to a crawl – or perhaps even ground to a halt. The “advance” estimate of U.S. second-quarter growth was reported at 2.4%, indicating a long road to recovery – during which unemployment is likely to remain far too high.

Almost half of the quarter’s gross-domestic-product (GDP) growth projected for the second quarter was inventory buildup. Government spending and a temporary housing blip – caused by the homebuyer tax rebate, which expired April 30 – accounted for the rest.

June durable goods orders, reported July 28, were unexpectedly down 1%, suggesting that even manufacturing is currently slowing. Add to that weak consumer confidence numbers for July and house sales well below expectations for both May and June, and it becomes clear that there’s cause for concern on the domestic front.

While inflation does not seem to be an immediate problem, unemployment remains appallingly high. That’s especially true of long-term unemployment, which – at 4.6% of the working population – is at a post-World War II record. The federal budget deficit is hovering at roughly 10% of GDP and interest rates remain close to zero, thanks to polices that are looking increasingly eccentric when compared to the routes that other countries have chosen to pursue.

It looks as if the U.S. economy will be dealing with the “Great Recession” for a long time to come. But most of the world’s other major economies are experiencing fairly rapid recoveries, meaning that they are putting the “Great Recession” firmly in the rearview mirror.

Searching For Growth

Cast your eyes away from the United States, however, and the picture becomes much brighter. Canada posted first-quarter growth of no less than 6.1%, and its budget is almost in balance. Even sluggish Britain expanded at 4.5% in the second quarter, and its heroic effort to balance its budget will undoubtedly help growth going forward. German industrial production was up 12.4% in the 12 months through May.

In fact, the overall Eurozone is safely into a growth mode – although its overall budget deficit is still dangerously high. The Economist estimates that shortfall it will reach 7% of GDP this year.

Turning to Latin America, we see that Mexico is something of a basket case. But Brazil is expected to grow at 7.8% this year, with Chile not far behind at 5%. Meanwhile, China is projected to grow at 9.9% in 2010, India at 7.9%, and wealthy South Korea at 5.9%. Even sluggish Japan will manage 3.1% growth.

The bottom line: The wise investor will allocate most of his money internationally.

Modest quantities should go into Europe – particularly Germany and Britain, where valuations are reasonable and growth prospects good. Some should go into Canada, China, Brazil and Chile – each of which have natural-resource-based economies. Canada and Chile also will benefit from having thoroughly reliable governments.

A large proportion should go into Asia: A little into Japan, where prospects appear somewhat brighter than they did a few months ago, and a substantial amount into China. Somewhat less should go into India, where valuations are too high and there are signs of inflation. Finally, a substantial chunk should head for South Korea, which boasts good growth, stability and a capable government.

America: The Global Growth Beneficiary

It’s important to remember that prospects for the U.S. economy are not universally gloomy.

The bad news is that the Obama administration and the U.S. Federal Reserve are together following the policies that Japan has followed for the most of its last 20 years, prolonging recession and producing dangerous bouts of deflation. (While I don’t agree with Federal Reserve Chairman Ben S. Bernanke’s excessive fear of deflation, there is no doubt that prolonged or steep bouts of deflation can be damaging, because they discourage investors from holding anything other than cash.)

There are, however, two bits of good news. The first is that U.S. policies may change. Bernanke will man his post until January 2014, so rapid change in ultra-low interest rates can’t be expected. However, the movement towards budget balancing is gathering strength in both political parties, and it seems likely that fiscal discipline will be restored once the new Congress takes office in January – following the midterm elections. If the budget is brought towards balance, as is happening in Britain, resources are freed up for the private sector and economic growth becomes easier.

The second, bigger piece of good news – not noticed by those who fear a Japanese “Lost Decade” type of future – is that the U.S. position differs from Japan’s in one important respect: Whereas Japan has always had a large balance-of-payments surplus, the United States currently has an enormous balance-of-payments deficit.

The United States has a huge advantage when world economic growth is strong, as is currently the case. With export markets growing faster than domestic consumption, exports will tend naturally to increase faster than imports, producing the most pleasant of all economic states – export-led growth.

Japan couldn’t grow its way out of its malaise, because its huge international reserves made the yen too strong, intensifying deflation. Furthermore, foreign countries became disquieted by Japan’s surpluses and erected hidden trade barriers against Japanese imports.

Of course, in the U.S. case, rapid growth in exports would reduce global imbalances, not increase them. The U.S. balance-of-payments deficit would decline, reducing its need for foreign funding. That would make the world economy more stable and increase its intrinsic growth rate. But it wouldn’t push up the dollar, because the balance of payments would still be in a deficit.

Provided that stern action was taken to rein in the budget deficit, U.S. economic growth would accelerate and unemployment would decline. If the budget deficit remained huge, there wouldn’t be so much money coming in from abroad, meaning domestic savers would be forced to buy U.S. Treasuries. That would force up interest rates and restrict the flow of funds to private-sector borrowers.

On balance, U.S. investors should be optimistic for 2011 and beyond. Rapid global growth should rectify the U.S. balance-of-payments problem, so that even modest fiscal discipline will produce a quickening of U.S. growth rates, and a full economic recovery.

Thus, we don’t need to emigrate in search of a better economy. But until the U.S. economy actually does turn around, our money should take an overseas vacation.

Actions to Take: Until the U.S. economy starts to show some real signs of life, U.S. investors need to up the ante on their overseas holdings – especially in such countries as China, Korea, Germany, Chile, Brazil, Canada and Britain.

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]]> http://www.permanentwealthinvestor.com/archives/foreign-growth/feed/ 0 The CIVETS: Windfall Wealth From the ‘New’ BRIC Economies http://www.permanentwealthinvestor.com/archives/the-civets-windfall-wealth-from-the-%e2%80%98new%e2%80%99-bric-economies/ http://www.permanentwealthinvestor.com/archives/the-civets-windfall-wealth-from-the-%e2%80%98new%e2%80%99-bric-economies/#comments Sat, 31 Jul 2010 19:18:49 +0000 Martin Hutchinson http://www.permanentwealthinvestor.com/?p=7089 Source MoneyMorning.com:

First it was the “BRICs.” Now it’s the “CIVETS.”

In fact, the CIVETS are the “new” BRICs: Expect some of the CIVETS economies (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) to be among the world’s hottest markets in the decade to come. They have the potential to generate the same [...]]]>

Source MoneyMorning.com:

First it was the “BRICs.” Now it’s the “CIVETS.”

In fact, the CIVETS are the “new” BRICs: Expect some of the CIVETS economies (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) to be among the world’s hottest markets in the decade to come. They have the potential to generate the same kind of windfall wealth as the BRIC markets of Brazil, Russia, India and China did over the last 10 years – but only if you pick the right markets at the right time.

So let’s figure that out right now.

The Birth (and Rebirth) of ‘The BRICS’

It’s been almost a decade – 2001, to be exact – since Goldman Sachs Group Inc. (NYSE: GS) economist Jim O’Neill conceived the “BRICS” acronym as a marketing vehicle that would convey the exciting investment potential of four key emerging markets (Brazil, Russia, India and China).

O’Neill is back – with a new list and a new acronym: The “CIVETS.” Given how much money investors have made from the BRICs, that suggests the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) deserve a closer look. Potentially, they may be the great growth markets of the new decade – or not!

O’Neill’s thesis is that growth is now spreading beyond the BRICs, whose stock markets have been pretty heavily explored at least by institutional investors, and that the CIVETS economies are the next chunky economies where growth seems likely and there is money to be made. Personally, I would buy Chile before any of them. But I suppose O’Neill would complain that the Chilean market was not big enough for the titanic wealth of Goldman Sachs!

The CIVETS Magical Mystery Tour

So allow me to lead us on a tour of the CIVETS markets, during which I will actually rate the profit potential (in standard Wall Street style), and will even expose any pitfalls that could render that potential moot.

Our CIVETS tour begins with Colombia, which looks like an excellent candidate for future growth. In fact, I said as much to Money Morning readers just last month, mere days after the voters confirmed center-right candidate Juan Manuel Santos (whose resume includes degrees from Harvard, the Fletcher School of Law and Diplomacy and the London School of Economics) as its new president. With 44 million people and a gross domestic product (GDP) of $231 billion, Colombia is certainly big enough to be worth considering. In a world in which resources prices are likely to trend upwards because of Chinese and Indian demand, I like the country’s agricultural and natural-resources orientation. What’s more, should the U.S. Congress ever actually ratify the U.S.-Colombia Free Trade Agreement (signed all the way back in November 2006), there should be a further boost to the Columbian market. The Economist‘s panel of forecasters projects growth of 2.5% this year and 3.8% in 2011. But that looks much too low to me. The projected 2010 budget deficit equal to 3.9% of GDP and the payments deficit of 1.6% of GDP look reasonable, as does the 2.6% inflation rate. The market’s Price/Earnings (P/E) ratio is 19.5, which is a little high. But when you sum it all up, Colombia is a “BUY.”

Indonesia is another country I have liked for a long time, particularly under its current, competent government of Susilo Bambang Yudhoyono, in power since 2004. With 243 million people and a GDP of $521 billion, it’s a substantive-enough economy to invest in. It’s well diversified, with agriculture, natural resources and substantial manufacturing. The level of corruption in the society is too high to be comfortable, but it remains lower than Russia. And it’s strategically situated between China and India, meaning it should benefit as both those behemoths grow. The Economist is pretty optimistic about growth, with forecasters calling for a 5.6% advance this year and 5.9% next year. The budget deficit is a reasonable 2.1% of GDP, and the current account is in surplus. With a P/E of 18, Indonesia’s stock market – like the aforementioned Colombia – is a bit pricey. Even so, Indonesia is definitely a “BUY.”

Vietnam is hailed as the next China. And with good reason: Vietnam has a culture that’s similar to the Red Dragon, it’s an ex-Communist, one-party state, and attracts foreign investment because of its cheap labor costs. Vietnam has a population of 90 million, but a GDP of only $92.4 billion. The problem here is that the old East Asian route to riches of cheap manufacturing is pre-empted by the behemoths China and India, so Vietnam may find it much more difficult to succeed than its East Asian predecessors did during the half-century that spanned 1950-2000. The Economist is optimistic about Vietnam’s growth prospects, predicting a 6.2% advance in 2010 and 7.0% in 2011. But the budget deficit is substantial at 7.7% of GDP, as is the payments deficit at 7.8% of GDP. Also highly worrisome: The inflation rate is expected to exceed 10%. Given that the stock market is small and highly speculative, and it’s very difficult for a U.S. investor to buy directly, I wouldn’t rush in too fast here. Still, keep an eye on this market: Vietnam is currently a “HOLD/BUY.”

Egypt makes the CIVETS acronym work nicely, but I can’t see why you would regard it as a growth economy. What’s more, it is essentially a one-party dictatorship in which the dictator – Hosni Mubarak – is 82. With 80 million people and a GDP of $190 billion, Egypt is surprisingly poor – especially given its geographical location close to Europe. The Economist expects this country to grow at 5.2% in 2010 and 5.4% in 2011 (but with population growth of a full 2% annually, that’s less impressive than it looks). The economy is heavily government controlled, and has few natural resources, given its excessive population. With a budget deficit of 8.7% of GDP, a payments deficit of 3.7% of GDP, an expected inflation rate of 12%, and an 82-year-old dictator, this market just doesn’t look attractive to me. Thus, I must say that Egypt is currently an “AVOID.”

Turkey is a pretty decent growth economy, albeit without many natural resources. But it now faces significant political risk. With 78 million people and a $608 billion economy, Turkey is (economically speaking) the largest of the CIVETS. In office since 2002, the current government of Recep Erdogan has done a good job on the economy. The Economist‘s forecasters say Turkey will grow at a 4.8% clip this year and another 4.0% in 2011. But that looks low – especially given that first-quarter growth ran at an annual rate of 11.7%. The budget deficit is 4.5% of GDP, the trade deficit 4.8% of GDP and inflation is expected to run at 10.1% in 2010. Also a concern: The public debt/GDP ratio – while well below its 2002 levels – is at 46%. Turkey has two possible paths down which it may travel, but they represent very different outcomes to investors: One is an opportunity, the other a danger. The opportunity is that Turkey finally gets a really decent free trade agreement with the European Union (EU) – without full membership – that allows it to manufacture for tariff-free sale throughout the EU market. The danger is that Erdogan reorients Turkish foreign policy towards the economic deadbeats of the Middle East. That makes Turkey a high-risk proposition. But the Turkish market’s P/E is only 11. It’s speculative, but on the whole I have to say that Turkey is a risky “BUY.”

South Africa is another resource-rich economy, which I believe to be a better basis than cheap labor for market emergence in the 2010s. With 49 million people, a barely growing population, and a GDP of $280 billion, South Africa is a decent-sized economy. However, Economist forecasters have it growing at a rate of only 2.8% in 2010 and 3.7% in 2011. With a budget deficit of 6.3% of GDP, and a payments deficit of 5.0%, this country’s finances are unattractive – even with the fact that The Economist expects inflation to run only at a tolerable 5.8%. The problem is management: The post-1994 South African governments have not shown they can run the economy well, in spite of South Africa’s resource advantages. What’s more, the Gini coefficient of inequality is 65 – the world’s second highest – which makes the society highly unstable. The market’s not cheap, either, given its P/E of 16. You may want to dabble in a gold mine or two, but even there the risks are less in places like Canada and the better bits of Latin America. For me, South Africa is too risky – and is a “HOLD,” at best.

All the BRICs would have made investors good money in the 2001-2010 time frame. Even so, I would have invested neither in Russia under Vladimir Putin, nor in Brazil until about 2006: The risks in both places were too high for the rewards. But I would have invested modestly in China as far back as 2001. And I did invest – very profitably – in India.

Like the BRICs, the CIVETS don’t offer a sure-fire recipe for investment profits. All the same, I think we’d be foolish not to look at possibilities in Colombia and Indonesia, and perhaps even Turkey, for now. And don’t forget about Vietnam, which will be very interesting when it opens further.

News and Related Story Links:

]]> http://www.permanentwealthinvestor.com/archives/the-civets-windfall-wealth-from-the-%e2%80%98new%e2%80%99-bric-economies/feed/ 0 The CIVETS: Windfall Wealth From the ‘New’ BRIC Economies http://www.permanentwealthinvestor.com/archives/the-civets/ http://www.permanentwealthinvestor.com/archives/the-civets/#comments Sat, 31 Jul 2010 13:59:00 +0000 Martin Hutchinson http://www.permanentwealthinvestor.com/?p=7094 The CIVETS: Windfall Wealth From the ‘New’ BRIC Economies Forget the BRICs… the term coined by Goldman Sachs economist Jim O’Neill coined to identify the potential of the emerging economies of Brazil, Russia, India and China.

There’s a new acronym in town: CIVETS.

Haven’t heard of it? You will.

It refers [...]]]>

Source MoneyMorning.com:
Forget the BRICs… the term coined by Goldman Sachs economist Jim O’Neill coined to identify the potential of the emerging economies of Brazil, Russia, India and China.

There’s a new acronym in town: CIVETS.

Haven’t heard of it? You will.

It refers to Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa… the new kids on the block that promise to deliver even bigger windfall wealth than the BRICs ever did.

But, only if you pick the right markets at the right time…

Read on to find out where the real potential in the CIVETS lies… and which markets should be avoided…

The Birth (and Rebirth) of ‘The BRICS’

It’s been almost a decade – 2001, to be exact – since Goldman Sachs Group Inc. (NYSE: GS) economist Jim O’Neill conceived the “BRICS” acronym as a marketing vehicle that would convey the exciting investment potential of four key emerging markets (Brazil, Russia, India and China).

O’Neill is back – with a new list and a new acronym: The “CIVETS.” Given how much money investors have made from the BRICs, that suggests the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) deserve a closer look. Potentially, they may be the great growth markets of the new decade – or not!

O’Neill’s thesis is that growth is now spreading beyond the BRICs, whose stock markets have been pretty heavily explored at least by institutional investors, and that the CIVETS economies are the next chunky economies where growth seems likely and there is money to be made. Personally, I would buy Chile before any of them. But I suppose O’Neill would complain that the Chilean market was not big enough for the titanic wealth of Goldman Sachs!

The CIVETS Magical Mystery Tour

So allow me to lead us on a tour of the CIVETS markets, during which I will actually rate the profit potential (in standard Wall Street style), and will even expose any pitfalls that could render that potential moot.

Colombia

Our CIVETS tour begins with Colombia, which looks like an excellent candidate for future growth. In fact, I said as much to Money Morning readers just days after the voters confirmed center-right candidate Juan Manuel Santos (whose resume includes degrees from Harvard, the Fletcher School of Law and Diplomacy and the London School of Economics) as its new president. With 44 million people and a gross domestic product (GDP) of $231 billion, Colombia is certainly big enough to be worth considering. In a world in which resource prices are likely to trend upwards because of Chinese and Indian demand, I like the country’s agricultural and natural-resources orientation. What’s more, should the U.S. Congress ever actually ratify the U.S.-Colombia Free Trade Agreement (signed all the way back in November 2006), there should be a further boost to the Columbian market. The Economist‘s panel of forecasters projects growth of 2.5% this year and 3.8% in 2011. But that looks much too low to me. The projected 2010 budget deficit equal to 3.9% of GDP and the payments deficit of 1.6% of GDP look reasonable, as does the 2.6% inflation rate. The market’s Price/Earnings (P/E) ratio is 19.5, which is a little high. But when you sum it all up, Colombia is a “BUY.”

Indonesia

Indonesia is another country I have liked for a long time, particularly under its current, competent government of Susilo Bambang Yudhoyono, in power since 2004. With 243 million people and a GDP of $521 billion, it’s a substantive-enough economy to invest in. It’s well diversified, with agriculture, natural resources and substantial manufacturing. The level of corruption in the society is too high to be comfortable, but it remains lower than Russia. And it’s strategically situated between China and India, meaning it should benefit as both those behemoths grow. The Economist is pretty optimistic about growth, with forecasters calling for a 5.6% advance this year and 5.9% next year. The budget deficit is a reasonable 2.1% of GDP, and the current account is in surplus. With a P/E of 18, Indonesia’s stock market – like the aforementioned Colombia – is a bit pricey. Even so, Indonesia is definitely a “BUY.”

Vietnam

Vietnam is hailed as the next China. And with good reason: Vietnam has a culture that’s similar to the Red Dragon, it’s an ex-Communist, one-party state, and attracts foreign investment because of its cheap labor costs. Vietnam has a population of 90 million, but a GDP of only $92.4 billion. The problem here is that the old East Asian route to riches of cheap manufacturing is pre-empted by the behemoths China and India, so Vietnam may find it much more difficult to succeed than its East Asian predecessors did during the half-century that spanned 1950-2000. The Economist is optimistic about Vietnam’s growth prospects, predicting a 6.2% advance in 2010 and 7.0% in 2011. But the budget deficit is substantial at 7.7% of GDP, as is the payments deficit at 7.8% of GDP. Also highly worrisome: The inflation rate is expected to exceed 10%. Given that the stock market is small and highly speculative, and it’s very difficult for a U.S. investor to buy directly, I wouldn’t rush in too fast here. Still, keep an eye on this market: Vietnam is currently a “HOLD/BUY.”

Egypt

Egypt makes the CIVETS acronym work nicely, but I can’t see why you would regard it as a growth economy. What’s more, it is essentially a one-party dictatorship in which the dictator – Hosni Mubarak – is 82. With 80 million people and a GDP of $190 billion, Egypt is surprisingly poor – especially given its geographical location close to Europe. The Economist expects this country to grow at 5.2% in 2010 and 5.4% in 2011 (but with population growth of a full 2% annually, that’s less impressive than it looks). The economy is heavily government controlled, and has few natural resources, given its excessive population. With a budget deficit of 8.7% of GDP, a payments deficit of 3.7% of GDP, an expected inflation rate of 12%, and an 82-year-old dictator, this market just doesn’t look attractive to me. Thus, I must say that Egypt is currently an “AVOID.”

Turkey

Turkey is a pretty decent growth economy, albeit without many natural resources. But it now faces significant political risk. With 78 million people and a $608 billion economy, Turkey is (economically speaking) the largest of the CIVETS. In office since 2002, the current government of Recep Erdogan has done a good job on the economy. The Economist‘s forecasters say Turkey will grow at a 4.8% clip this year and another 4.0% in 2011. But that looks low – especially given that first-quarter growth ran at an annual rate of 11.7%. The budget deficit is 4.5% of GDP, the trade deficit 4.8% of GDP and inflation is expected to run at 10.1% in 2010. Also a concern: The public debt/GDP ratio – while well below its 2002 levels – is at 46%. Turkey has two possible paths down which it may travel, but they represent very different outcomes to investors: One is an opportunity, the other a danger. The opportunity is that Turkey finally gets a really decent free trade agreement with the European Union (EU) – without full membership – that allows it to manufacture for tariff-free sale throughout the EU market. The danger is that Erdogan reorients Turkish foreign policy towards the economic deadbeats of the Middle East. That makes Turkey a high-risk proposition. But the Turkish market’s P/E is only 11. It’s speculative, but on the whole I have to say that Turkey is a risky “BUY.”

South Africa

South Africa is another resource-rich economy, which I believe to be a better basis than cheap labor for market emergence in the 2010s. With 49 million people, a barely growing population, and a GDP of $280 billion, South Africa is a decent-sized economy. However, Economist forecasters have it growing at a rate of only 2.8% in 2010 and 3.7% in 2011. With a budget deficit of 6.3% of GDP, and a payments deficit of 5.0%, this country’s finances are unattractive – even with the fact that The Economist expects inflation to run only at a tolerable 5.8%. The problem is management: The post-1994 South African governments have not shown they can run the economy well, in spite of South Africa’s resource advantages. What’s more, the Gini coefficient of inequality is 65 – the world’s second highest – which makes the society highly unstable. The market’s not cheap, either, given its P/E of 16. You may want to dabble in a gold mine or two, but even there the risks are less in places like Canada and the better bits of Latin America. For me, South Africa is too risky – and is a “HOLD,” at best.

Investing in the CIVETS

All the BRICs would have made investors good money in the 2001-2010 time frame. Even so, I would have invested neither in Russia under Vladimir Putin, nor in Brazil until about 2006: The risks in both places were too high for the rewards. But I would have invested modestly in China as far back as 2001. And I did invest – very profitably – in India.

Like the BRICs, the CIVETS don’t offer a sure-fire recipe for investment profits. All the same, I think we’d be foolish not to look at possibilities in Colombia and Indonesia, and perhaps even Turkey, for now. And don’t forget about Vietnam, which will be very interesting when it opens further.

]]> http://www.permanentwealthinvestor.com/archives/the-civets/feed/ 0 As Problems in India and Russia Escalate, Let’s Drop the BRIC http://www.permanentwealthinvestor.com/archives/bric-economies/ http://www.permanentwealthinvestor.com/archives/bric-economies/#comments Fri, 06 Mar 2009 08:24:21 +0000 Martin Hutchinson http://www.moneymorning.com/?p=5516 By Martin Hutchinson
Editor,  Permanent Wealth Investor
Money Morning, Investment News

When Goldman Sachs Group Inc. (GS) coined the term “BRICs” in 2003 to cover Brazil, Russia, India and China. This group of four countries was [...]]]> By Martin Hutchinson
Editor,  Permanent Wealth Investor
Money Morning, Investment News

When Goldman Sachs Group Inc. (GS) coined the term “BRICs” in 2003 to cover Brazil, Russia, India and China. This group of four countries was supposed to represent the enormous potential of the emerging markets, and their populations would provide most of the world’s growth in the decades ahead. For a year or two, Goldman’s theory seemed to work and the “BRIC” acronym became immensely fashionable.

But now that the global downturn has hit, the four countries have diverged, and it is no longer clear what they have significantly in common. Money Morning actually raised some of these concerns in a two-part series that ran in August – back even before the downturn reached crisis proportions, or analysts began questioning the BRIC concept. So let’s revisit the four countries again right now, take a look at each one, and see for ourselves whether there’s still any merit to the BRIC concept.

Brazil: Staying Strong

Brazil is one of the real economic success stories of the last six years. In 2003, it had just elected a socialist president and appeared close to default – its membership in the BRIC group was highly tentative. The commodity boom of 2004-2008 was highly beneficial to Brazil, the country’s government worked hard to bring down the budget deficit, while its central bank kept interest rates far above the rate of inflation. Consequently, when the commodity bubble burst in mid-2008, the central bank was able to keep domestic demand growing by relaxing its interest rate policy.

Brazil’s economy – as measured by gross domestic product (GDP) – advanced at a 5.3% annual clip in 2008. The forecasting panel of The Economist only expects Brazil to grow at a 1.6% pace this year, but that’s much better than most places. Its inflation rate is 6% – too high, but at least it avoids deflation.

Brazil’s short-term interest rates remain suitably restrictive at 12.5%, and its stock market is down only 4% this year, which is more than investors can say for Wall Street.

Brazil remains a successful growth story, albeit at a moderate rate. What’s more, its oil company, Petroleo Brasileiro SA (Petrobras) (ADR: PBR), has found offshore reserves of oil that from 2012 (when production begins) onward seems likely to make Brazil one of the world’s premier oil exporters.

Whenever someone assembles a list of the world’s great growth economies – no matter what parameters are used – Brazil is virtually certain to be part of it.

Russia: Shooting Star Flames Out.

While Brazil has emerged as a success story, Russia’s early promise has given way to a somewhat bleak reality. Indeed, since that Goldman paper was written in 2003, Russia has been transformed from a successful emerging market into a corrupt kleptocracy without the rule of law and with only oil exports propping it up. Now that oil prices have dropped, Russia is in trouble. Its consumer prices are rising at a 14% clip on fudged official data, its currency is collapsing – down by a third in the past year – and stock prices are down 80% from their high last spring. Even Russia’s population is declining.

The bottom line: Russia is neither emerging, nor a market. Unless oil prices recover rapidly, or the country undergoes a sudden conversion to secure property rights, it seems fated to remain impoverished, and to have its economic vigor diverted into military adventurism. It should be on nobody’s list of growth opportunities.

India: Political Ineptitude Blunts Growth

India did well in 2004-2008, thanks largely to the reforms carried out by the Bharatiya Janata Party (BJP) government of Atal Bihari Vajpayee in 1998-2004. However, the current Indian National Congress-I (Congress) Party-dominated government has made almost no further reforms, and the Indian economic machine is showing clear signs of running down.

While 2009 growth is still expected to be around 5%, estimates of the consolidated budget deficit range as high as 12% of GDP. India is not China: It does not have the huge foreign exchange reserves to finance such a deficit. Thus, the rating agencies are considering downgrading India’s debt to “junk” status.

Given the financing difficulties India is likely to run into, it must be probable that growth will once again be thwarted by lack of foreign exchange, so that India reverts to the traditional “Hindu rate of growth” of 3 to 4% – a growth rate that’s nowhere near enough to lift its rapidly growing population out of poverty. Another election is to be held in the spring, but it seems unlikely that the BJP will win a government majority (Vajpayee has in any case retired) – in which case the government overspending and opposition to reform of the last five years will continue. India would then remain an enormously frustrating enigma, a country with huge growth possibilities that is shackled by a corrupt and incompetent government.

China: The Leader of the Pack

My colleague, Keith Fitz-Gerald, has christened China as the main engine of world growth, and that role seems likely to continue – in spite of the current difficulties the emerging Asian giant appears to be facing. China’s government has pledged an enormous stimulus plan of more than $600 billion, far larger in terms of the Chinese economy than the U.S. counterpart proposed by American President Barack Obama.

However, with roughly $2 trillion in foreign-exchange reserves, huge domestic savings and a budget that is close to being balanced, it seems likely that China can afford its stimulus, and that by increasing domestic demand the stimulus will pull the country out of recession without causing excessive financing difficulties.

The aforementioned Economist panel expects China to grow at a 6% pace this year, but that number may well be conservative. China’s shares are still down 60% from their peak, but they have risen by 20% this year and look attractive at these levels.

Thus, the BRIC group of emerging-growth economies has become merely a capital ‘C,’ with a modest ‘B’ trailing behind. There is some possibility of an ‘I’ rejoining our growth acronym, but there’s apparently no current hope for ‘R.’

In fact, when it comes to the BRICs, there’s only one conclusion to reach: The acronym is broken.

[Editor's Note: When it comes to either banking or the international financial markets, there's no one better to hear it from than Money Morning Contributing Editor Martin Hutchinson, for he brings to the table the kind of high-level expertise that our readers have come to expect. In February 2000, for instance, when he was working as an advisor to the Republic of Macedonia, Hutchinson figured out how to restore the life savings of 800,000 Macedonians who had been stripped of nearly $1 billion by the breakup of Yugoslavia and the Kosovo War.

Just last month, Hutchinson published an analysis on the "Top 12 U.S. banks" report. If you missed story, which enjoyed a big response when it was published last Wednesday, please click here to access it and check it out. The report is free of charge. The follow-up story on that story was his analysis of Fifth Third Bancorp (FITB). The report on Fifth Third appeared last Friday. Both reports may be well worth your time to read.

And back in August, well before the ongoing global financial crisis reached the depths it has now achieved, Hutchinson authored a two-part series that detailed the strengths and weaknesses of the four “BRIC” nations. If you missed it – or just want to read the stories again – please click here to read Part I (Brazil and Russia), or click here to read Part II (India and China). The reports are free of charge.

Hutchinson also writes regularly for our monthly newsletter, The Money Map Report, in which he and other Money Morning colleagues also make investment recommendations for subscribers. To find out more about The Money Map Report - including a special offer that includes The New York Times bestseller, "Crash Proof" - please click here.]

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