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Global Investing: Hitting a BRIC Wall

by: Thomas Smicklas June 05, 2008 | about stocks: ABV / AES / BUD / EWZ / FMX / FXI / KO / KOF / PGJ / PIN / RSX    

Thomas Smicklas

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Investing globally is viewed by most as an essential portfolio strategy. I can't take issue with this, as I am one of those who believe this to be true. Truth is, I am probably over-weight in foreign securities. Occasionally it is a good idea to remind oneself that buying securities in such bastions of economic and legal stability such as China, Russia, Brazil and, to a certain extent, India does come with increased risk, and the potential to lose a great amount of capital in a short period of time.

China loves investment - on its own terms, as it controls many stocks through special voting rights and exercises control to the extreme over practically any venture that threatens to loosen the communist dogma that is omnipresent, albeit with a smiling face at present.

Russia and its adjacent minion States are slipping backwards as investment opportunities, selectively confiscating capital invested by foreigners and dictating a "power putsch" against many exploration and infrastructure companies once capital has been expended on projects that are just about ready to turn a profit.

India is a maze of conflicting rules, regulations and corruption that twists democracy to produce a constant squeeze on companies to feather the nests of the ruling class and tossing a bone here and there to the massive welfare state through oppressive taxation, employment demands and playing the old game of "west vs. east" in the political and economic arenas.

Brazil presents an interesting and current case in point. The Brazilian Congress and Senate passed a bill last Friday that would abruptly increase the taxes on beer and soft drinks. Cola bottlers, for instance, would need roughly 20% price increases to consumers to offset the tax while brewers would need an almost 30% hike in price to break even under the proposed law. AmBev (ABV), Anheuser Busch (BUD), Coca Cola (KO), Coca Cola FEMSA (KOF), FEMSA (FMX) and ImBev [INTB.BR] would be impacted the most by this tax scheme.

In the beer industry, as with soft drinks, the Brazilian government has installed flow meters in the production plants in order for the government to deal with tax avoidance by the smaller producers. This is likely to be expanded for all bottlers. The fact that the beverage tax passed both the Brazilian Congress and Senate seemed to catch most observers by surprise. Is Petrobas safe from a rude investor surprise?

No one should be taken off-guard by governments in developing regions implementing tax and control policies that run contrary to investors who have put millions and billions of dollars into ventures only to have their efforts ruined, deliberately or not, by governments run by greed and/or extortion.

This article is harsh. Perhaps too harsh. However, it is prudent to remember that we have a unique and rich capital investment system in the United States and other recognized developed nations, despite all of the warts. Not every country we choose to invest in grants investors true and tested rights and privileges - just ask those bottlers in Brazil, the oil companies in Russia and power company AES (AES) in the backwaters of Kazakhstan. Invest globally, but consider marginal "rest of the world investments" as speculation.

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This article has 6 comments:

  •  
    Jun 05 10:06 AM
    Thanx for your free offer - I don't mind learning more (or, about a mistake)
    Reply
  •  
    Jun 05 10:46 AM
    Your description of India is quite apt but at the same time there's hardly any other country of comparable size that is growing at 8.8%. For the record, we are not recommending investments in India at this time. In the BRIC countries, Brazil and Russia have positive momentum at present.
    Reply
  •  
    Jun 05 02:34 PM
    Wouldn't the new tax on beer in Brazil adversly affect Inbev the most?
    Maybe Inbev could be bought by A/B instead of the other way around.
    Reply
  •  
    Jun 06 10:20 PM
    Very good article and quite sobering indeed. Putin has totally betrayed the Russian people who deserved freedom and democracy. He completely fooled the Bush It Artist himself, although that was to be expected. Investors beware as he (and his new puppet) try to take over anything of value as they lead the country back to communism. China can't be trusted, that's a fact. And Brazil's president is a socialist who might also be playing the same game Putin used to lure investors into his trap. It's a crazy world.
    Reply
  •  
    Jun 08 02:24 PM
    I certainly agree with the thrust of what you say having owned Pan American Silver. The Russians rigged the "auction" for a defunct bankrupt silver mine. Pan America was the winning bidder. After investing a few million to get the property producing the Russians then revealed a second bidder that had not had their bid "properly allowed". They had no money! Once they were able to bid the same price on the vastly improved property they had no trouble getting financing. Pan American then had a new "partner" in the mine. Yet we see the same in Canada with the reform of the tax system on Royalty trusts comming in a few years. Unfortunately not all countries can be economic basket cases like the USA and still achieve steady positive Treasury TIC data reports. In many cases higher taxes in foriegn nations are just a repudiation of the Reformed Laffer Curve economic model. Only in America can you cut taxes and drastically increase spending to pander to the investor class without dire social and economic consequences. So far..... $4 gasoline and $5 heating oil & road diesel sure are working here! Now the trade deficit grows no worse even as the national debt tops $3.4 trillion and the stimulus checks are in the mail! The Fed cuts to 2% and Citigroup floats out the preferred M at 8.5% which promptly drops in price and goes to an 8.7% YLD. Emerging markets nations have alot larger middle class in terms of numbers than the US. But the numbers living in abject poverty are still unimaginable. As in all civilized societies taxes are going higher to fund the bread and rice. No one has forgotten what happened to the Ceaucescus in Romania, the Romanovs in Russia, and the Louis and Marie in France. It isn't their hunger that drives the masses into hysteria, it is watching their children starve to death that really pisses them off.
    Reply
  •  
    Jun 08 02:34 PM
    A foot note. For those wanting to have some kind of exposure to the Russian part of the BRIC, the MPYMX & deeply discounted CEE both dabble in Russia but are also invested in the other more civilized portions of Eastern Europe as well as Turkey. Ditto the FLATX. Alot of Brasil but the same diversification throughout Latin America including Mexico. The MAPTX in the China "region".
    Reply
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