Tuesday, February 22, 2005


Much ink has been used in regard to "BRIC's". If you have not heard, BRIC is the current "hot" investment term. It stands for investments in the emerging markets of Brazil, Russia, India and China. Any time the media names an investment strategy, I grow leery of investing in the area.

Another widely reported fact is that Japan has dipped into yet another recession. The numbers are a little funky but the report has been widely distributed. It is common sense that Japan, with an energy dependent economy, would suffer under high oil prices.

I am reminded of the well reported popularity of "RVing" in the late 60's. Winnebago was in the news. All reports indicated that the majority of Americans would soon discover the joy of camping. Playboy magazine did a several page layout of the the biggest and best RV's. Of course, all this press was just before the energy crisis hit. The press helped push Winnebago higher for a time. Within two or three years, the stock hit $110 per share and dropped to $2 per share.

The Japanese market and the emerging markets have a very low correlation. The r square is only 37. In the past 4 years, the emerging markets have been "hot, hot, hot". The Japanese market has been weak. In recent weeks, the EFT's for several of the emerging markets have stalled out and EWJ, one of the Japan EFT's, has done likewise. With the news media talking up BRIC's and talking down Japan and yet with little price movement, one must assume that smart money is moving out of emerging markets and moving into Japan.

The story is much more complicated. Russia and Brazil are resource rich markets and India and China are resource consumers. Japan's market and the US market correlate at an even lower level (r square of only 33).

My guess is that the large cap US market will out-perform Japan and BRIC's for a while. In any event, I intend to avoid investing new money into BRIC's while the press is talking them up. They may make a run with the support of the press but when the market turns, speculators will need to jump out quickly.

Tying all the markets together, one can simply say that when long bond rates start to rise, emerging growth markets will feel the pain more so than others.