BRIC Breakout

In our mid-December article, we weighed in on the debate over the Federal Reserve’s approach to interest rate policy:

“Many politicians have derided the Fed as unnecessary and declared chairman Ben Bernanke ignorant at best. It can be politically expedient to criticize policymakers, but at the end of the day Bernanke still controls the Federal Open Market Committee. His word is gospel. Ignore the hawkish views expressed by some committee members; a rate hike isn’t in the cards.”

Yesterday, the Fed announced its commitment to maintain exceptionally low interest rates through 2014. For now, the lingering debate over a potential rate hike has been put to rest.

Furthermore, the market seems to have discounted much of the dismal economic news, as evidenced by its recent advance.

We’ve long asserted that the global markets have priced in a lot of bad news, including the possibility of a global recession. As a result, we’ve adopted a more aggressive posture for our recommended allocations for 2012.

Fortunately, the markets have obliged, particularly the emerging markets, which remain a focus of our recommendations. Thus far, Brazil, Russia, India and China (BRIC) have outperformed both their peers in the emerging markets and the developed world. After suffering for much of 2011, Indian equities have led the way in 2012, though there are corners of the Subcontinent’s market that still offer opportunities for value-conscious investors.

Investors who build an allocation to the BRIC nations early could be rewarded with substantial gains later this year, especially if these countries overcome negative sentiment.

Of course, there is a possibility that the emerging markets’ strong January performance could merely be a function of seasonality. January is traditionally a month in which institutions lard their portfolios with riskier fare.

However, it’s entirely possible that emerging markets’ outperformance could persist, especially since these nations are enjoying both monetary easing and declines in inflation. Unless the markets suffer an exogenous shock, these economic developments bode well for emerging market stocks.

In the meantime, mutual funds that specialize in emerging markets have enjoyed strong inflows. Many emerging market nations boast relatively strong economies, and their equity markets still offer attractive valuations, particularly in Russia and the Asia-Pacific region.

As China concludes its Lunar New Year celebration, it’s time to reiterate our view that the Chinese economy will continue to be the primary engine of global economic growth. The Middle Kingdom’s gross domestic product (GDP) should grow by at least 8 percent in 2012, especially if policymakers are able to cool the country’s overheated real estate market without negatively impacting its broader economy.

Some analysts worry that the Chinese central government’s reluctance to ease economic policies by midyear could result in a crash of the country’s real estate market. Although the Chinese government does not have an unblemished record when it comes to managing the country’s real estate market, we’re inclined to give them the benefit of the doubt.

This year, our favorite markets in order of preference are China, South Korea, Russia, Taiwan, and India. And our favorite sectors are banking, energy, cement, technology and automotive. Opportunistic investors could find 2012 a more propitious year for risk-taking.