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BRICs, Doubts, And Global Alternatives

11/15/12 11:17:31 AM
by Billy Williams

The US is in a maelstrom of economic doubt and political scandal that leaves 2013 in doubt for some investors, but fortunately, there are the BRICs.

Security:   IFN
Position:   Hold

In the US, often the center of economic activity and news, the country finds itself at a critical juncture just after its 2012 election, which leaves the future in doubt as how it will perform on the world stage. The President has just been reelected and finds himself embroiled in scandals, 31 states have started secession petitions, the economy is still shaky, and investors are in doubt as to how to go forward in 2013. Fortunately, the markets are global in the 21st century and there are a number of alternatives that offer the promise of strong trends for traders and steady growth for investors.

First on center stage are the BRICs: Brazil, Russia, India, and China.

BRICs, coined in 2001 by Goldman Sachs analyst Jim O'Neil, offers a unique set of advantages and disadvantages to prospective speculators. In general, each country has risen from humble beginnings by adopting Western models of capitalism, low taxation, and low regulation coupled with motivation and ambition to join the world stage as an economic powerhouse.

FIGURE 1: IFN. India's economic rise can be observed by looking at the IFN's price chart, where it peaked in 2008 and then drifted downward. With a shift in the Indian political climate, the question arises on whether India can maintain its attractive economic environment for foreign investors.
Graphic provided by:
Russia adopted a flat tax almost 10 years ago with the hopes that it would incentivize works and businesses to invest and create jobs. The same for Brazil, which during that time was the weakest performer of the four countries, but with rich resources and political reform it could carve a path toward superpower status in the coming years.

China's ascension to the world stage has left the global markets almost absolute in its view that China will be the next great economic power with the possibility of holding sway over the entire Pacific Rim, possibly pushing the US out of that sphere of influence.

Even India is flexing its muscle and not just with the world, taking China head on for influence on the world stage as a highly educated population provides the raw intellectual muscle in engineering, medicine, and information technology. See Figure 1.

FIGURE 2: IFN. IFN is trading below key resistance as it tries to climb its way higher. Emerging markets like the BRICs, and India specifically, offer the potential for high returns even as the US stumbles. Still, emerging markets tend to have big runups followed by breathtaking crashes, so be sure to do your due diligence always.
Graphic provided by:
However, each of the countries in general have one glaring fault, and that is the lack of respect for private property and personal freedom.

The human rights abuses and quasi-socialist bent have left investors in doubt in that if they invest their money in the BRICs, then they will be able to get it out.

Russia and China have less than sterling records on human rights and the rule of law with China leading the world in piracy and intellectual theft. In Russia, political opponents to the government are jailed or end up missing in suspicious circumstances.

India has recently returned to power the Socialist Congress party, replacing the Vajpayee government that led the country to economic reform and prosperity from the late 1990s to 2004. The Socialist Congress party was single-handedly responsible for wrecking the Indian economy during its reign from 1947 to 1990. Now that it is back in power, the future looks ominous as India strains to hold on to its economic gains. See Figure 2.

The global markets have made the world an even playing ground for any country that wants to attract capital and investment in exchange for maintaining an attractive environment for the safety of investor capital, not just the reserve of the US. But it's still up to the investor/trader to maintain due diligence, especially in emerging markets like the BRICs.

Countries that were formerly authoritarian tend to revert back to their old ways once conditions improve, and if they become desperate, they have a nasty habit of seizing cash and assets (for example, Venezuela). Still, they can become attractive investments till then, so consider using exchange traded funds (ETFs) or concentrated investments run by emerging market funds like the India Fund (IFN) to help control your risk while catching the meat of the next potential uptrend.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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