Oil Below $120 Will Reverse `BR-IC' Fortunes

It is great saying that "Oil moves the world", it is our dependency on Oil which is making our life tough, there is no reliable substitute of Oil found till now. Till now commodity producing countries like Brazil & Russia was in demand and consumption driven economy like India/China was getting beaten down. Now after crude started falling, investor see value in these consumption driven economy like India/China. So, if you want to make money from Investment in India/China, just keep tab on the crude.

Commentary by Andy Mukherjee
Merrill Lynch & Co. strategist Mark Matthews has a checklist for investors in India and China.

If the price of oil goes below $120 a barrel (from about $126 yesterday), if China's annual inflation rate slows to 5 percent (from 7.1 percent last month), and if the U.S. banking crisis comes to an end, then the sagging fortunes of equity markets in the two Asian countries may reverse in relation to their better-performing ``BRIC'' cousins: Brazil and Russia.

At the beginning of this year, Indian and Chinese stock markets, taken together, were almost three times as large as the combined value of shares traded in Brazil and Russia. Since then, the gap has almost halved.

• Brazil's Bovespa Index, the world's 10th-best-performing, has risen more than 5 percent in U.S. dollar terms this year.
• Russia's Micex Index has declined 11 percent.
• Indian and Chinese benchmarks have taken a hammering, falling 36 percent and 42 percent, respectively.

BRIC has become ``BR-IC'': two disjointed halves.
With runaway commodity prices, such an outcome was only to be expected. After all, Brazil and Russia produce a lot of the stuff that 2.3 billion people in India and China guzzle. By contrast, Indian and Chinese energy and resource producers have little exportable surplus and are forced to satisfy domestic demand at less-than-remunerative prices. These companies have, therefore, been nowhere as appealing to investors as their counterparts in Brazil and Russia.

`Good Bargains'
Templeton Asset Management Ltd.'s Mark Mobius said this week that Indian and Chinese shares offer ``good bargains.''
``When the stock markets of China and India start to outperform those of Brazil and Russia, it could well be a sign the environment is changing,'' the Merrill analysts said. Or perhaps the environment will change.

Changing Environment?
Investors in India and China should be happy that the political rhetoric and the policy environment in the U.S. are becoming increasingly intolerant of speculation that doesn't suit that country's short-term economic interest.

The U.S. Securities and Exchange Commission last week banned so-called naked short sales in shares of Fannie Mae, Freddie Mac and 17 financial firms. Meanwhile, from capping the number of contracts per investor to making traders report their holdings, lawmakers in Congress are considering as many as 15 proposals to pull oil prices down by legislative action.

Oil has dropped 15 percent from a record $147.27 on July 11. Metal prices, too, are beginning to ease. Cooling commodity prices may well play a role in narrowing the gap between stock-market performance in Brazil and Russia on the one hand, and in India and China on the other.
However, equity investors in India and China have been spooked by a surge in inflationary expectations that were left unchecked for far too long by authorities in their blind pursuit of growth. Policy makers will now have to suppress inflation decisively to win back the confidence of investors.