Tide Going Out on BRICs

June 25, 2012 8:23 AM EDT
Warren Buffet put it this way, "It's only when the tide goes out that you learn who is swimming naked." With this in mind, many analysts are predicting a tide change in countries commonly referred to as BRICs (Brazil, Russia, India, China). Some of the problems pointed out by analysts include Brazil's default rate, the effect declining oil prices have on Russia, India's budget deficit widening, and Chinese home prices. By themselves, any of these problems would be troublesome. Taken together, fears are growing that we only see the tip of the iceberg, so to speak.

"What we'll see now is basically a full-blown credit problem," said Amit Rajpal, Marshall Wace LLP, who predicts rising defaults in Brazil will resemble the collapse of the U.S. subprime mortgage market five years ago.

Others agree. "When the global economy and capital flow slow down, it's going to expose a lot of problems in these countries and make people stop and ask questions. A run on the currency could be particularly ugly. I am quite bearish," Stephen Jen, a managing partner at hedge fund SLJ Macro Partners LLP and a former economist at the International Monetary Fund, said in a phone interview with Bloomberg.

So far, the BRIC troubles are mainly manifesting themselves in the currency markets, with the real, ruble and rupee weakening against developed market currencies, while the yuan has depreciated against the dollar.

Emerging market ETFs like iShares MSCI Emerging Markets Index (NYSE: EEM) and Vanguard Emerging Markets ETF (NYSE: VWO) have experienced choppy trading action this year, and the tend is set to continue going into the second half of the year. Investors, meanwhile, have a growing love affair with the U.S. dollar and the ETF (NYSE: UUP), which is posting steady gains.

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