04/15/15   The BRICS Are Back

Editor’s Corner

Ron Rowland

Do you remember the BRICS?  It is more than just an acronym – it is an actual five-country association consisting of Brazil, Russia, India, China, and South Africa.  Many people still refer to them as the BRICs (with a lower case ‘S’), forgetting that South Africa officially became a member of the group in 2010.  They are all large, significant, developing countries with rapidly growing economies.  Given the fact that Taiwan and South Korea are already considered to be “developed” by some classification standards, these five represent the leadership of the emerging markets.

From 2003 through 2007 the BRICS were hot.  Their economies were booming, their stock markets were zooming, and it was hard to have a conversation about international investing without them being mentioned.  The global financial crisis of 2007-09 took all five BRICS for a loop.  They bounced back strongly in late 2009, but they couldn’t extend those recoveries into the ensuing years.  With lagging performance, investors started looking elsewhere for global growth.  The BRICS countries were shunned in favor of lower-tier emerging and developing markets.  As such, they have been flying under most investors’ radar the past few years.

Four of the BRICS are handily beating US stocks so far in 2015, and by significant margins.  The S&P is up about 3% year-to-date, while a popular South Africa ETF has tacked on about 8%.  India is doing even better, posting a 12% gain.  China has been surging lately, and it is already up more than 20% this year.  However, they all pale in comparison to Russia, which had pumped up its value by more than a third as of yesterday’s close, and today’s gains should put year-to-date return of the Market Vectors Russia ETF (RSX) at more than 38%.

Brazil is the only one of the five BRICS not beating the US so far this year.  However, the year is not over, and Brazil is currently on the rise.  Although it was severely underwater in mid-March, the iShares MSCI Brazil ETF (EWZ) has jumped close to 20% since then, while the S&P 500 has tacked on just 3%.  The BRICS are back.

Investor Heat Map: 4/15/15

Sectors

The two big changes in the sector rankings this week are the rise of Energy and the fall of Real Estate.  After more than half of a year of being at or near the bottom, Energy moved from red to green a week ago, and it has now vaulted from tenth place to fourth.  Energy-related equities bottomed in mid-December, about three months ahead of the low for oil prices this cycle. Energy stocks have been in a low volatility uptrend the past month and are now on the verge of breaking to new highs for the year.  Real Estate went the other way this past week, plunging from third to tenth and flipping over to a slightly red reading in the process.  The longer-term uptrend for Real Estate is still intact and could help reverse its short-term weakness.  Back at the top of the sector rankings, Consumer Discretionary swapped places this week with Health Care claiming the top spot today.  These two have been providing most of the upside leadership in 2015.  Consumer Staples moved up a notch to occupy the space that Real Estate abandoned.  Telecom, Industrials, Technology, Financials, and Materials are bunched in the middle of the rankings and are slightly lagging the market.  The Utilities sector remains on the bottom of the stack, and it is one of the two sectors in the red along with Real Estate.

Styles

Most style categories received a momentum boost this past week with Mid-Cap Value being the one exception.  Mid-Cap Value slid one spot as a result of this, and Large-Cap Blend moved up to take its place.  That was the only change in the relative rankings this week, but from an absolute strength perspective, Mega Cap gained enough momentum to move back into the green.  The market continues to favor smaller companies and growth characteristics, allowing Small-Cap Growth to remain at the top for a 12th week.  Micro Cap, Small-Cap Blend, Mid-Cap Growth, and Small-Cap Value round out the top five.

Global

From a momentum perspective, China is leaving the rest of the world in the dust.  There is a 67-point gap between China and second-place Emerging Markets.  We don’t recall ever seeing this much disparity in our weekly momentum charts, and while we aren’t prepared to declare it a record, it is certainly an anomaly.  The large reading indicates that Chinese stocks are currently trending upward at an annualized rate of 102% based on intermediate-term data.  However, their nearly 20% surge in the past few weeks is probably not sustainable, and short-term action could be highly volatile.  China’s strength was responsible for the rise in Emerging Markets, from fourth to second.  Russia also played a positive role, but it is not one of the major categories included on our chart.  Japan and Europe both slipped slightly, and Pacific ex-Japan climbed t wo spots to put itself close on the heels of Europe.  Despite market strength here at home, the US continues to slip in the global rankings and this week is another notch lower.  The improvements in foreign markets had to overcome renewed strength in the US Dollar, making them all the more impressive.  Last week, Latin America and UK were still in the red.  This week, they both sport positive momentum readings, and the UK has pulled ahead of Latin America.

Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

 


“Russia has gone to a floating exchange rate and we welcome this because a floating exchange rate
compensates the growth and decline of the country’s export goods prices.”

Olga Yangol, vice president and senior product specialist for emerging markets at HSBC


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