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The Surprising Truth about Investing in the BRICs

A strange thing has been happening in global markets over the past month or so. As the U.S. recovery gathers pace, the U.S. stock market is beginning to outperform its high-growth global rivals.

While most investors — myself included — take it for granted that most global stock markets will outperform the United States year after year, that just may not turn out to be the case in 2010.

A quick glance at the 12-month charts, comparing the performance of the MSCI Emerging Markets Index and the U.S. S&P 500, confirms that the United States is now running neck and neck with red-hot global markets.

In fact, with a bit of a year-end rally, there is a slight chance that the U.S. market will have outperformed emerging markets this year.

S&P 500 Versus the MSCI Emerging Markets Index

The results are even more surprising if you compare the performance of the S&P 500 to that of the BRICs — BrazilRussiaIndia and China.

It turns out that as of about two weeks ago, the U.S. S&P 500 now actually is outperforming its high-profile BRIC rivals over the past 12 months.

S&P 500 Versus the MSCI BRIC Index

“Who’d have thunk it…?”

But investing in today’s media darlings has little to with making money in the financial markets. It turns out that the best places to make money over the long term are ignored — or even treated with distain — by the mainstream press.

Investing in the BRICs: Some Surprising Results

There’s no better example than China. While those who visit Shanghai and Beijing rave about China’s soaring skyscrapers and dynamic economy, you couldn’t tell all that from the performance of the Shanghai Stock Exchange in 2010.

In fact, despite its recent rally, Shanghai’s index — carrying the millstone of inefficient Chinese state-owned enterprises — has underperformed the S&P 500 by a wide margin.

Going into the final stretch of 2010, Shanghai has lagged its U.S. rival by more than 20%.

S&P 500 Versus Shanghai Composite

That doesn’t mean some investors have not made money in the dozens of edgy, small-cap Chinese stocks that have come to market in 2010. And investors in theiShares FTSE China 25 Index Fund (FXI) will have eked out a small gain. But even as China has overtaken Japan as the world’s second-largest economy in 2010, Shanghai is likely to end up the worst-performing, major emerging market of 2010.

Brazil tells a similar story. After a relentless rise that far outpaced the United States for many years, Brazil’s Bovespa barely has finished in the black for 2010. In fact, if you are a U.S. dollar-based investor who invested in the iShares MSCI Brazil Index (EWZ), you’ve actually lost money in 2010.

S&P 500 Versus iShares MSCI Brazil Index (EWZ)

India is only slightly better. Although India’s stock market has outperformed the United States over the past 12 months, Mumbai and New York have run neck and neck over the last six months, with the race “too close to call.”

S&P 500 Versus BSE 30 Sensex

But it’s the final member of the BRICs, Russia, which is the most surprising.

Russia, after all, is the ultimate “hate country.” After the collapse of 1998, one investor famously declared: “I would rather eat nuclear waste than invest in Russia.” Jim Rogers and George Soros agreed with the assessment of Warren Buffett’s partner Charlie Munger, who said, “We don’t invest in kleptocracies.”

Yet for all of the bare-chested shenanigans of Russia’s Prime Minister Vladimir Putin, Moscow’s show trials and the country’s famous corruption , Russia has been by far the best investment among the BRICs over the past decade, clocking up a Warren Buffett-beating, 25%-plus annual returns since its collapse in 1998.

And it looks like Russia is just about to match that historical average in 2010 as well, comfortably outperforming the S&P 500 by a 2:1 margin.

S&P 500 Versus Market Vectors Russia ETF (RSX)

Russia is the Top-Performing BRIC — Something Fishy?

Beyond the BRICs

The top-performing global stock markets of 2010 were in countries probably not on your radar screen. Although the final decision still is out on whether it was 2010’s #1 performer, one country stands out for its resilience throughout the year.

Earthquakes notwithstanding, free-market maven Chile — a long-standing recommendation in my trading service Global Bull Market Alert through the iShares MSCI Chile Investable Mkt Idx (ECH) — certainly will end up among the top-performing stock markets of 2010.

It’s worthwhile seeing how this small country has outperformed not only the U.S. S&P 500 over the past two years, but BRIC star Russia as well.

S&P 500 Versus iShares MSCI Chile Investable Mkt Idx (ECH)
and the Market Vectors Russia ETF (RSX)

So, what’s the takeaway?

As China’s example shows, fast economic growth and growing heft in the global economy do not necessarily translate into top investment gains.

In China’s case, it’s been quite the opposite.

And it is highly ironic that it is the most corrupt and most hated market in the world that has delivered the best performance among the BRICs. And with a compound annual growth rate close to 25% per year, among the BRICs, no one comes close to Russia.

And it’s hard to argue with the numbers…

So, if you really want to turbo-charge your investment profits, ignore the headlines and expand your investment horizons beyond media darlings China, India and Brazil.

Your portfolio will thank you for it…


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Asian Tigers Revisited: Asia’s Overachiever

If Singapore were a college student, it’d be the iconic student-athlete — a polite, white-bread, high-school valedictorian, a two-sport college athlete, who is also top-ranked Division I running back, a Heisman trophy finalist and a future NFL star — a Toby Gerhart among countries.

Indeed, the number of times that Singapore appears at the top of global economic rankings is nothing short of astonishing — and kind of annoying. Singapore ranks #1 in global innovation and competitiveness. It’s ranked first for having the most open economy for international trade and investment. And it’s the world’s easiest place to do business. And unlike, say, a (lucky) trust-fund country like Norway which pumps its wealth out of the ground, Singapore achieved all this by dint of sheer hard work. Over the past 40 years, Singapore has transformed itself from an economic backwater to an Asian Tiger success story. When this former British colony became a fully independent country in 1965, its per capita GDP was a lowly $511. Today, that figure has risen to $53,192, making Singapore wealthier per person than the United States.

So, if you believe that betting on the perfect kid is a worthwhile investment strategy, you could do worse than to include Singapore in your investment portfolio.

Asia’s Overachiever: Getting the Basics Right

A city-state at the tip of the Malay Peninsula with a population of just over 4.8 million, ironically, the secret to Singapore’s success is the diametric opposite of the individualistic, entrepreneurial-driven, quintessentially American success story of Silicon Valley. Singapore’s authorities are famously interventionist, having power to prosecute people who violate laws relating to “improper use of the Internet.” They once even famously banned the sale of chewing gum.

Its positively un-American approach to economic development notwithstanding, Singapore has gotten the basics right. And Singapore’s low levels of corruption, skilled workforce, stable environment, and efficient infrastructure have made it arguably the greatest economic success story among the Asian Tigers. Corporate tax is a mere 17% and personal taxes are only 20% on incomes over $300,000 Singaporean dollars ($213,000). In the midst of the Great Recession, unemployment never hit higher than 3.4% –a figure unimaginable to most Western economists. Recently, Singapore also has become the world’s fastest-growing offshore banking center, and its strict bank secrecy laws and a favorable tax regime have put the country on track to become the 21st century’s answer to Switzerland.

Not that it’s been clear sailing for Singapore over the past decade. Since the 1997-98 Asian financial crisis and the sudden downturn in world trade in 2001-02, the government has intensified its efforts to nudge Singapore toward a “knowledge-based” and service economy. During the 1990s, Singapore was the world’s leading producer of disk drives. Today, like its neighbors, Singapore is facing the loss of competitiveness against China. That’s why the philosopher kings of Singapore have embarked upon a mission to promote Singapore as a premier tourist destination.

Singapore was hit hard by the global economic downturn, but has bounced back quickly. In the second and third quarters of the year, GDP rose by nearly 9% and has now made up all but 1.8% off its peak. Property values have soared, forcing the government to take steps to prevent possible asset bubbles. Singapore’s economy likely will expand at a rate of 6.5% in 2010 — a rate virtually unheard of for a country already this wealthy.

Asia’s Overachiever: Path to Stock Market Profits

While the U.S. markets have had quite a run since last March, Singapore has outperformed the S&P 500 over the last 12 months by almost two-to-one. Since the market bottomed in March of 2009, the iShares MSCI Singapore Index (EWS) is up an eye-popping 114%.

While the headlines blare about China’s and India’s economic achievements, Singapore just might be the single most under-appreciated economic success story on the planet. And you too can take part in the fruits of this Asian Tiger’s remarkable economic success by investing in the iShares MSCI Singapore Index (EWS) ETF.

As annoying as Asia’s Overacheiver can be, it’s hard to argue with success — and profits.

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