I am retired and take educated guesses on all things financial.

June 05, 2008

June 5,2008: Hitting a BRIC Wall

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 loose 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 the 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 whom 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 in the backwaters of Kazakhstan. Invest globally, but consider marginal "rest of the world investments" as speculation.

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