The largest emerging markets have seen $15 billion of outflows this year -- the largest since 1996 -- as the MSCI BRIC Index fell 24%. Some analysts predict worse will come.
Together, the stock markets of Brazil, Russia, India, and China have more than quadrupled gains in the Standard & Poor's 500 Index in the last decade and their economies grew four times faster than America, reports Bloomberg. "Now Goldman Sachs Group (GS), which coined the term BRIC, says the best is over for the largest emerging markets."
Why the gloomy outlook? According to Bloomberg "slowing exports to Europe and government restrictions on real-estate investment are curbing the expansion in China, the biggest emerging economy." India's growth has been constrained by "the fastest interest rate increases since 1935 ... which fueled inflation and deterred foreign investment."
Bloomberg adds, "Brazil and Russia, whose growth during the past decade was spurred by surging commodity demand, have been hurt by falling metals prices and the slowdown in China."
Analysts are wrapped in debate over the future of BRIC economies.
According to Arjuna Mahendran, head of Asia investment strategy at HSBC Private Bank, BRIC indexes may fall another 20% next year, buffeted by the liquidity squeeze stemming from Europe's sovereign debt crisis. He tells Bloomberg that nations such as Indonesia, Nigeria, and Turkey may overshadow the BRICs in the next five years as they expand from lower levels of growth.
James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, told Bloomberg that emerging-market stocks will probably outperform U.S. equities next year as central banks in developing countries cut interest rates to stimulate economic growth. As evidence, "the MSCI emerging-markets gauge rose an average 35 percent after the BRIC nations began cutting interest rates in 2003, 2005 and 2008."
Ok Hye Eun, a Seoul-based fund manager at Woori Asset Management Co., disagrees. He tells Bloomberg that "BRIC markets won't be an attractive destination for a while because there are still ongoing risks. I see more opportunities in the U.S."
September estimates from the International Monetary Fund (IMF) suggest average economic growth in BRIC nations will slow to 6.1% from a 9.7% high in 2007.
So, we're wondering, are there any BRIC stocks being targeted by bearish investors?
For ideas, we collected data on short-seller trends and identified a list of BRIC stocks that have seen a sharp increase in shares shorted over the last month (i.e. an increase in bets that these stocks will decline).
This is significant, especially when you consider that short-sellers tend to be more sophisticated investors (due to the fact that they require strict credit approval to perform these trades). So if these investors are turning bearish on a stock, it's worth paying close attention.
To further refine the quality of our list, we collected data on institutional money flows, and identified five BRIC stocks that have seen significant institutional selling during the current quarter.
Big money managers have extensive resources to analyze investing ideas. So if they're dumping a certain stock, it's worth paying close attention.
Sophisticated investors, like hedge fund managers and short-sellers, think these BRIC stocks are in trouble -- do you agree? Or is this excessive pessimism a contrarian buy signal?
Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. LDK Solar
2. Perfect World
3. Spreadtrum Communications
4. Trina Solar
5. VanceInfo Technologies
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. List compiled by Eben Esterhuizen, CFA.
Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Institutional data sourced from Fidelity, short data sourced from Yahoo! Finance.