Welcome back BRICs! We missed you

Brazil (EWZ, quote), Russia (RSX, quote), India (INP, quote), and China (FXI, quote) have been lagging broader emerging market ETFs (VWO, quote), diverging fairly substantially after China announced its lowered growth target of 7.5%.

This has made investing overseas a difficult thing for most in the past few months.

However, we may be nearing a critical point whereby the big four are about to stage a big comeback.

Take a look below at the price ratio of the Guggenheim BRIC ETF (EEB, quote) relative to the Vanguard Emerging Markets ETF (VWO, quote).

As a reminder, a rising price ratio means the numerator/VWO is outperforming (up more/down less) the denominator/VWO.

I’ve annotated the chart to show that the ratio appears to have hit the ratio support that got triggered in early August as the summer crash was underway in worldwide equities — and having hit that support, is now bouncing back.

The sudden surge back in the relative performance of the BRICs seems to coincide with rising bets that China will likely lower rates, and that Brazil’s interest rate easing cycle is not done.

Sentiment has undoubtedly been negative on emerging economies, but I would argue that in many ways that is the exact reason why a turnaround may be in the cards, with BRICs leading the charge.

Continued strength also sends an important message about broad risk-taking.

If BRICs can come back into vogue, it signals growth bets are back, and as such, so is the bull market. The next leg higher in the 2012 reflation theme I have continually addressed likely begins overseas.

by Michael A. Gayed CFA for Emerging Money.

The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized advice. The opinions herein are not personalized recommendations to buy, sell or hold securities.

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