Market Overview

A New Resident In The BRICS House? (EPI, IDX, EWZ)


In 2001, Goldman Sachs (NYSE: GS) coined the BRIC acronym to form an illustrative home for the fast-growing emerging markets titans of Brazil, Russia, India and China. South Africa was later added to the mix turning BRIC to BRICS.

Following some important emerging markets news on Wednesday, BRICS may remain, but not without a potential change. There is an "I" in BRICS, but speculation is that India may be on its way out in favor of Indonesia after Standard & Poor's caught Indian policymakers off-guard by paring its outlook on India's BBB- rating to negative from stable. The ratings agency warned India has a one-in-three chance of losing its already fragile investment grade rating.

The importance of a country's membership in any of the emerging markets acronyms for ETF investors is up for debate. However, India could prove to be an interesting case assuming it is usurped by Indonesia as the BRICS' "I."

Arguably, none of the other BRICS constituents have been hammered by inflation over the past 12-18 months the way India has been. India's current account and fiscal deficits surged in its most recently completed fiscal year and a spate of interest rate hikes by the Reserve Bank of India last year proved largely ineffective in damping inflation.

Proving that investors sometimes love controversy, the WisdomTree India Earnings ETF (NYSE: EPI) has outperformed the iShares MSCI Brazil Index Fund (NYSE: EWZ), the Market Vectors Russia ETF (NYSE: RSX), the iShares FTSE China 25 Index Fund (NYSE: FXI) and the iShares MSCI South Africa Index Fund (NYSE: EZA) by healthy margins this.

The EGShares Shares India Small-Cap ETF (NYSE: SCIN) and the Market Vectors India Small-Cap ETF (NYSE: SCIF) are among the best performing small-caps ETFs in 2012. Not to mention, EPI and comparable India-specific ETFs have easily outpaced the Market Vectors Indonesia ETF (NYSE: IDX), the largest ETF tracking the country that could be the next "I" in BRICS.

India's risk of expulsion from BRICS and a move to junk status are palpable. Those actions, which are clearly not mutually exclusive, could prove to be highly damaging, at least right off the bat for ETFs such as EPI, SCIN and SCIF. A move to junk status would elevate India's borrowing costs and with growth slowing in Asia's third-largest economy, global investors may be compelled to explore other Asian opportunities.

Even at BBB- with a negative outlook, India is some dubious company. That same rating/outlook combination is held by Barbados and Tunisia making India the lowest-rated of the BRICS by S&P.

Indonesia, Southeast Asia's largest economy, is the bystander in this edition of "How The BRICS Turn," but the country has often been mentioned as worthy member of the group. The country is already a member of the CIVETS and MIST clubs.

The idea of "BRIICS" has been mentioned before and talk of S&P's reluctance to elevate Indonesia to investment grade status doesn't appeared to have cooled speculation Indonesia could find its way into another emerging markets acronym. Plus, Indonesia has the support of some important international investors.

Dennis Lim of Franklin Templeton recently said: "With access to natural resources such as timber and coal, Indonesia has potential to benefit from increasing global demand for commodities, mainly due to rising infrastructure development in many emerging markets which see a continued demand for hard commodities.

"When the 1997-1998 Asian financial crisis struck, the Indonesian government responded by taking control of a portion of private sector assets through the acquisition of non-performing loans, and executed a debt restructuring process. The results are a more transparent and open economy, and improved corporate governance in Indonesia."

Mark Mobius, executive chairman of Templeton Emerging Markets Group, which manages more than $40 billion in emerging markets assets had 11% of the $1.1 billion Templeton Emerging Markets Fund and 13.6% of the $15 billion Templeton Asian Growth Fund in Indonesia at the end of 2011.

If Indonesia makes the leap to BRICS status remains to be seen as does any impact on ETFs such as IDX, the iShares MSCI Indonesia Investable Market Index Fund (NYSE: EIDO) and the Market Vectors Indonesia Small-Cap ETF (NYSE: IDXJ). However, it's clear India's BRICS status may be on life support and that could prove problematic for Indian ETFs assuming the country cannot right its macroeconomic issues.

For more on India ETFs, please click HERE.


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