Investing Daily

China and India are the major emerging-market foundations of global manufacturing and service growth, while Brazil and Russia have emerged as leaders of the energy and commodities sectors.

Because of the current market conditions and the increased risk associated with emerging markets during such volatile times, we’re not recommending buying heaps of BRIC-related plays at present. Under the tight global credit conditions, investors are on edge, wondering what’s going to happen next. Therefore, we’re taking a cautionary stance, providing some quality companies for your consideration over the long-term. These plays are strong and set for ample growth for years to come.

Brazilian Wax and Wane

When Goldman Sachs introduced the term BRIC and its associated emerging markets in 2003, many wondered whether Brazil was deserving of the distinction. Its long-term growth had lagged, averaging less than 2 percent per year since the 1970s, and the country only barely escaped bankruptcy in 2002. But energy and commodity prices started a long ascent to sky-high levels, and revenue flowed to mining companies and agri-business operations.  

The country’s once-hopeless ethanol program took off, as rising oil prices made Brazilian sugarcane the world’s cheapest, most economically and ecologically sound source for ethanol. Brazil’s ethanol-from-sugar program became the talk of the town as oil prices skyrocketed above $100 a barrel and beyond.

But Brazil’s commodity boon also led its recent downfall. Brazil’s stock exchange index, Bovespa, is down around 30 percent so far this year, largely because of commodities slowdown. Brazil has more than 30 American Depositary Receipt (ADR) listings on the New York Stock Exchange, which have made it particularly vulnerable to steep US market downturns, such as the mess we’re currently facing. Its reliance on Wall Street will prove quite challenging until we see a marked, lasting turnaround.

In the meantime, however, the ventures of Brazil-based mining giant Companhia Vale do Rio Doce (NYSE: RIO, CVRD) remains robust despite the recent dip in the commodities markets. Its stock suffered a slight blow of late, and its dividend pays just more than 1 percent. But with operations in metals that are in high demand--such as iron ore, gold, nickel, copper and coal--the current market volatility will have little effect on its long-term potential.    

CVRD still holds its reign as the largest global producer and exporter of iron ore and pellets, holding more than 40 percent of the seaborn market. It’s also the second-largest mining company in the world, with a market capitalization of almost $180 billion. It’s well diversified and actively engaged in mineral exploration efforts in 19 countries. CVRD’s presence is alive on five continents, and its steel-making operations show no signs of slowing down. In fact, steel demand is still on the rise around the world, making CVRD a sure winner into the next decade.

Russia’s Seeing Red

In comparison to the rest of the group, Russia is perhaps the least politically sound of the BRIC countries. Its recent decision to invade Georgia has had a significant impact on the Russian economy, with the financial markets losing almost a third of their value. The ill-advised move left a sour taste in investors’ mouths, as many have decided to move onto companies based in more stable economies.

As a result of the country’s emphasis on military power--and its use of such force--Russia is now paying the costs for its behavior. The Russian ruble has depreciated by around 10 percent since the conflict began, and investor confidence has taken a nosedive, with losses in market capitalization totaling hundreds of billions of dollars.

However, Russia’s highly speculative market does hold a number of moneymakers. Its economic growth has been driven largely by high oil prices. And following its partial seizure of Royal Dutch Shell in 2006 and BP properties several months ago, Russia will continue to dominate economic activity in the energy sector.

Russia is second only to Saudi Arabia as the world’s largest oil exporter. Earlier this year, however, Russian oil production failed to grow for the first time in a decade, sending a ripple of anxiety through the markets. But because Russian oil accounts for less than 15 percent of the world’s supply, this year’s production drop hasn’t been catastrophic.

Russia’s largest state-controlled oil company, Lukoil (OTC: LUKOY), is a high-quality speculative play. Like many Russian plays, Lukoil has experienced a lot of volatility because of a power struggle between BP and Russian investors’ joint venture, vertically integrated oil company TNK-BP, which had lowered investor confidence during the bitter battle. But an agreement has been reached, calling for TNK-BP CEO Robert Dudley to step down before the year’s end. Under the agreement, BP will keep its 50 percent stake in the company and appoint a replacement for Dudley. TNK-BP’s board will be responsible for the final seal of approval.

The deal is expected to boost confidence in Russia’s energy sector. This is good news for Lukoil, which recently launched the jointly-owned Yuzhno Khylchuyu field with ConocoPhillips in Russia’s Timan Pechora oil and gas province. The field’s oil production is expected to reach more than 150,000 barrels per day in 2009. The oil will then be transported along the coast of the Barents Sea for sale in Europe and North America.

India Loses Steam

India’s stock market is down more than 20 percent so far this year. But its economic growth remains steady and is expected to grow 8 percent by the end of the year. India’s wavering position in the global economy is largely challenged by the poverty of much of the population.

Just as in many countries, higher energy and commodity prices have had a negative affect on India. Amid its rising inflation rate earlier this year, the government placed restrictions on rice exports and subsidized other food and gasoline, exacerbating the country’s budget deficit. And the problem won’t disappear once the restrictions are lifted because unregulated consumer prices will likely soar as a result.

Despite its challenges, India’s growth will continue to be bolstered by its manufacturing services and global customer support, which has become a national stronghold, particularly in this tech-savvy period of globalization. Once it rolls over this bump in the road, India will continue to produce large profits for years--even decades--to come.

One company that’s sure to profit from the tech bug is Infosys Technologies (NSDQ: INFY), a Bangalore-based software behemoth. In this tech-heavy era, Infosys is a fairly safe bet even during rocky economic times. One of its biggest advantages: it’s protected beneath the Indian government’s tax shelter for IT companies, lowering its tax rate below 10 percent. Moreover, the company is growing at a rate of more than 35 percent per year, fueling its rise in revenue from $555 million in 2002 to well more than $2 billion a year ago.

China’s Post-Olympic Blues

Many Chinese investors had hoped that the Beijing Olympics would boost their country’s lagging stock market, but it seems just the opposite has transpired. The Shanghai Index has fallen around 15 percent since the beginning of the Beijing games in August. But despite the slowdown, China’s more than 10 percent GDP still ranks among the highest in the world.

China’s economy has slowed from 11.3 percent in the fourth quarter of 2007 to 10.1 percent in the second quarter of 2008 for myriad reasons, including weaker external demand, tightening domestic policies and the Sichuan Province earthquake. The most recent slowdown, however, doesn’t correlate to the Olympics but to the waning of developed economies. As the economic crisis in the US unfolded, growth in the dollar value of China’s exports slowed to 22.7 percent from last year’s 28.7 percent. The slowdown is even worse in terms of volume, given the renminbi’s appreciation and rising export prices.

But despite the gradual slowdown led by weaker external demand, export growth has held up fairly well above 20 percent year-over-year. Exports to the European Union and the US are expected to drop further through the rest of the year. But exports to fellow global emerging markets are expected to remain resilient, eventually leading to a turnaround for this global manufacturing goliath.

Yanzhou Coal Mining Co. (Hong Kong: 1171, NYSE: YZC), China’s largest coal miner, is one bet that will benefit from an increase in exports once a bottom is reached. The company has been ramping up production over the past few months to meet rocketing global demand for coal. And with China commissioning a new coal-fired power station each week, Yanzhou will continue to benefit from soaring demand.

If you believe it’s time to hit the BRICs, keep the increased risk associated with such economies in mind. And remember that the key to investing in emerging markets is to buy in and stay the course through periodic downturns--barring any serious disasters, of course--for long-term growth.