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UNDERSTANDING RISK IN BRICS

When Goldman Sachs economist Jim O'Neil first dubbed the four nations of Brazil, Russia, Indiaand China as the BRICs, back in !!", he made one of the #utsiest lon#$term #lobalmacroeconomic calls of all time% &eaturin# the ri#ht demo#ra hics, (ast commodit) *ealth,

#ro*in# middle classes and relati(el) stead) fiscal andmonetar) olicies, O'Neil ostulated thatthese nations *ould be the bi##est dri(ers for future #lobal #ro*th% So far, the economist's

rediction has #enerall) come true% +he SCI BRIC inde- has risen b) more than ei#ht times*hat the S./ 0!! inde- returned durin# the ast decade, and the BRIC's combined G1/ soaredto 2"3%3 trillion last )ear%

+hat out erformance has rom ted man) in(estors to add the four horsemen of the de(elo in#*orld to their ortfolios as a *a) to cash in on the #rou 's torrid #ro*th% 1es ite the ros) lon#$term #ro*th icture for the BRICs, there are lent) of risks, aside from the #lobalmacroeconomic ressures in these nations% In the end, these nations aren't called 4emer#in#4 fornothin# %

With the BRICs continuin# to contribute so much to the #lobal econom) and *ith the nationsmakin# u a hu#e ortion of emer#in# market assets, it is critical for in(estors to understandthese risks% 5et, each of the four nations is a com letel) different animal and com rehendin# thedifferences in each of their risk rofiles can be a dauntin# task% 6ere are some of the internalrisks *hen in(estin# in the BRICs%

A Dragon of Lies

When it comes to emer#in# market in(estin# as a *hole, China remains at the to of man)in(estors' minds% 7fter all, the nation re resents the hallmark of the de(elo in# market thesis%6o*e(er, in(estin# in 7sia's 1ra#on econom) isn't as eas) as bu)in# stock in German)%

/erha s the bi##est roblem is the lack of G77/ or international accountin# standards% +hatissue has e(en cau#ht some of the best in(estors b) sur rise% &or e-am le, billionaire hed#e fundmana#er John /aulson lost a bundle on +oronto$listed Chinese forestr) firm Sino$&orest Cor % It*as accused of fakin# land holdin#s and 4 cookin# the books %4 Others ha(e been accused offalsif)in# bank de osits and accounts% +hat lack of trans arenc) and disclosure of informationmakes it a lot harder to see the real icture, es eciall) com ared *ith de(elo ed market stocks%

+hat icture #ets e(en muddier *hen in(estors are forced to deal *ith 8uestionable officialChinese data and a hea(il) re#ulated9bureaucratic communist #o(ernment% +he ma:orit) of thema:or firms in the nation are in some *a) o*ned or controlled b) Bei:in# %Russia's Corruption Woes1es ite the nation's recent entr) into the World +rade Or#anization ;W+O

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Bribes and or#anized crime infiltratin# le#itimate businesses remain standard ractices%7ccordin# to a re ort b) the Information Science for 1emocrac) &oundation, the a(era#eamount of ett) bribe in the Russian &ederation has increased steadil) in the last "! )ears% Backin !!", it *as rou#hl) ",>"? rubles% B) the time !"! rolled around, it had #ro*n to 0, >0rubles and re resented @3A of an a(era#e *orker's salar)%

+hen there is the national #o(ernment to contend *ith% oicin# an o inion that conflicts *ith/resident ladimir /utin's *ishes could lead to )our business or in(estments bein# seized as *ellas a otential rison sentence% Just ask ikhail hodoro(sk), former Chairman and CDO ofRussian oil #iant 5ukos, *ho *as con(icted of fraud in !!0 for reasons that are belie(ed to be

oliticall) moti(ated%

LATAM's Commo it! KingWhile outri#ht corru tion isn't as bi# of a roblem for Brazil as it is for Russia, the #o(ernment

does ha(e a hand in creatin# risks for in(estors that stem from its 4 rotectionist 4 attitude% +hecountr) no* has the second$hi#hest number of rotectionist measures in Eatin 7merica, after7r#entina% +his includes rules to fa(or local roducts, hi#h tariffs on im orted #oods, ta- breaksto encoura#e domestic roduction and limitin# the access of forei#n in(estors to strate#ic naturalresource assets% &or e-am le, in(estors *antin# to ta the nation's (ast oil *ealth must artner*ith state$o*ned ener#) #iant /etrobras% O(erall, these olicies could derail some in(estmentreturns if Brazil decides to #o one ste further and nationalize (arious assets%

Asia's Bureau"rati" Nig#tmareWith a democrac) as lar#e as India's, )ou *ould e- ect there to be some red ta e *hen it comes

to successful in(estment% 6o*e(er, the nation's bureaucrac) has been called the 4most stiflin# inthe *orld%4 Startin# a business in India is incredibl) hard, as the local and national #o(ernments#enerall) ha(e a hand in the commercial markets% Eike*ise, enforcin# contracts can beim ossible, es eciall) *hen there is a ro ensit) for business artners to enter into undeclaredthird$ art) transactions% +he /olitical and Dconomic Risk Consultanc), a 6on# on#$based think tank, estimates that India's bureaucratic s)stem *ill re(ent it from matchin# the #ro*th rates ofother ri(al nations%

T#e Bottom Line+he BRICs offer much in the *a) of ortfolio and economic #ro*th, ho*e(er, there are some

rett) bi# risks for indi(idual in(estors as *ell% Fnderstandin# these risks is ke) to na(i#atin#these emer#in# #iants successfull)%

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