NEW YORK (Options-Profits) -- Market sentiment about the BRIC countries is not what it once was. With one exception, the emerging market growth engines have stalled and, as a result, investor flows in the past 12 months have been directed much more toward developed markets:
- Russia:Russia's economic and political problems are well known. Even aside from troubles created by recent political decisions, the country is dependent upon oil and gas revenue in a world economy experiencing a glut of fossil fuels. Weak institutions and legal protections make the country less attractive to value investors, and obviously the geopolitical risk has not dissipated.
- China: The growth miracle has become more of a routine parlor trick, as China now works through overbuilt housing and industrial capacity and struggles to avoid forcing too many debt defaults while keeping credit growth in check. The debate is about whether economic growth will decline to the 3% to 5% range; this year's optimists, calling for 6% to 7% growth, were insisting on 8% to 9% not that long ago.
- Brazil: As China's demand for commodities has vanished, countries like Brazil and Australia have been forced to recalibrate as well. Brazil also struggles with corruption and inflation. The potential for a turnaround is not as dim here, but many US and European investors remain skeptical.
- India: India is the recent darling of emerging market investors, as the new government is perceived as reform-friendly. The Sensex Index is up almost 30% over the past year in local currency terms, and the longer-term growth picture has been deemed more positive as well. India has more favorable demographics than Russia and China, and strength in sectors like technology and telecommunications are more attractive than the materials focus of many other emerging economies. Returns this year have been more modest (up 2.5%) however, and some investors are wondering whether sentiment and valuations have moved ahead of real progress. Much of the Modi government's changes are still at the level of plans and promises. And for the index underlying WisdomTree India Earnings ETF (EPI) one of the most popular ETFs for investors seeking exposure to India, the price/earnings multiple has risen from under 10 late last summer to about 15 today. While earnings growth in the held companies has been positive, most of the change is simply multiple expansion, so investors with an eye on shorter-term results may want to consider positions that would take advantage of reduced expected upside products like EPI.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.