There was a big excitement about the BRIC (Brazil, Russia, India, China) countries among investors last year. The excitement was in to some extent understandable, despite the Global Depression GDP growths were (Br:0%,Ru:-7%,In:5.5%,Ch:8.2%, The Economist), with the exception of Russia quite a respectable performance. It was, probably still is, believed that the emerging economies are better prepared for the 21st century and will be shaping the world (I think this notion is ridiculous, but more on that sometimes later).
Last yeat, the BRIC stock markets grew in dollar terms by (Br:154%,Ru:128%, In:95%,Ch(SSEB):129%), USA grew in the same period by 26% and Euro area by approx. 29% in dollar terms. Note that some of the market have suffered a huge blow in 2007. In February 2008, the change on December 2007 was (Br:-50%,Ru:-73%,In:-61%,Ch:-60%). Us fell in the same period by -43% and Euro Area by -55%.
In my opinion, diversifying portfolio and investing in the BRIC countries made sense some time ago (I would have bought an index). I don’t think it does anymore. I think the stocks (especially IPOs) are overpriced.
Investors are looking for positively skewed stocks (low probability of huge payoff – Imagine you bought Lenovo few years ago), and are in their overconfidence persuaded that the stock they’ve bought is going to be next success story, like Lenovo, so they are willing to overpay for it. Where to find more highly skewed stocks than in the emerging markets?…
They are also looking for ambiguous stocks (stock with not known fundamental value), if the fundamental value is unknown investors can dream that they have had a luck and picked the next Microsoft. And they overpay for the stock… Given the analyst coverage, information, laws protecting investors etc. guess where to find more ambiguous stocks, in the US or in the BRIC countries?
Last (but probably most importantly) seeing how the BRIC countries have weather the crisis have made us think that they really are different and better prepared for the 21st century. We got extremely excited about the developing world and the excitement got extended on their stock markets…
To put it very bluntly, B(R-who knows)IC markets are overvalued because investors got overexcited about them.
Yesterday came out an article in the FT, the article says the same thing as I do that the BRIC stocks are overvalued, but completely misses the point why. I would recommend reading last four paragraphs (the author gives few indicators of stock market overvaluation for China) . The first paragraphs are nonsense. To give one simple short example, the answer to paragraph 4 is: buy an index and the problem he is talking about is gone…
p.s. Investing in the B(R-who knows about Russia)IC markets as analysts still recommend is equally stupid as buying gold…