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What's Wrong With the Biggest Emerging Markets?

NEW YORK ( TheStreet) -- In the years preceding the financial crisis, investors swarmed to the BRICs -- Brazil, Russia, India, and China. But those markets have slipped to the sidelines lately.

This year iShares MSCI Russia ETF (ERUS) declined 8.1%, while iShares FTSE China 25 (FXI) dropped 6.7%. ETFs from India and Brazil have also dipped into the red. The poor performance of the BRICs is particularly notable because other emerging markets have been thriving. This year iShares MSCI Philippines (EPHE) gained 23.8%, while iShares MSCI Indonesia (EIDO) climbed 16.0%, and iShares MSCI Turkey (TUR) returned 12.9%.

Can the BRICs regain the lead? Not yet, says James Upton, a portfolio manager for Morgan Stanley. "The BRICs are essentially broken," he said in a talk at a recent investment conference. "They all hit peak growth rates, and they are slowing down."

GDP growth in China has fallen sharply in recent years, dropping from 10.4% in 2010 to 7.8% in 2012. In India, the rate dropped from 11.2% to 4.0%. Upton says that the slowdown should not be surprising.

As countries such as Korea and Taiwan modernized, their growth rates soared to double-digits and then declined. "After you have had a period of strong growth, it is hard to continue growing at double-digit rates," he said.

Upton says that China must slow down because the government has been spending at a pace that cannot be sustained. He says that countries should spend from 25% to 35% of GDP on infrastructure and other long-term investments, but China has been spending 48%.

"A lot of the infrastructure in China is superb now," he said. "They have high-speed trains and airports that are the best in the world. But it gets to the point where you cannot continue to add to that."

Brazil's GDP growth rate dropped from 7.5% in 2010 to 0.9% last year. Upton says that the country has been spending only 18% on investments. Poor roads and other outdated infrastructure have created bottlenecks. In addition, prices of commodities fell as demand from China weakened.

Soft commodity prices have taken a toll on Russia, which recorded a GDP rate that fell from 4.3% in 2010 to 3.4% in 2012. Russia has failed to diversify its economy away from dependence on oil exports.
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ERUS $13.20 -2.40%
EPHE $34.10 -0.31%
EIDO $22.35 -1.50%
FXI $32.24 -1.30%
THD $66.06 -1.60%


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DOW 17,645.92 -104.99 -0.59%
S&P 500 2,051.14 -12.23 -0.59%
NASDAQ 4,727.6040 -35.62 -0.75%

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