"Equity markets have started to anticipate much more difficult economic times in these countries," Shaoul said in a June 28 phone interview from New York. "The balance of risks is to the downside."
Petrobras Falls
Brazilian consumer defaults increased to a 30-month high in May, while prices for Russia's oil exports have dropped about 10 percent this year. In India, the central bank unexpectedly left interest rates unchanged last month after inflation accelerated. A gauge of Chinese manufacturing compiled by the government fell to a seven-month low in June.
BRIC stocks will trail shares of developed markets as many state-owned companies put the interests of their governments ahead of shareholders, Smith wrote in a June 26 research report.
Petrobras, as the Brazilian oil producer is known, tumbled 9 percent on June 25 to the lowest level since November 2008 after securing a smaller fuel price increase than investors had anticipated. The Rio de Janeiro-based company, whose market capitalization has dropped to $122 billion from $214 billion a year ago, sells fuel at below-market prices to help the government contain inflation in Brazil.
Low Rates
India may lose its investment-grade credit rating as Prime Minister Manmohan Singh's administration struggles to curb a record trade deficit, a budget shortfall that exceeded targets and fighting within the ruling coalition, Standard & Poor's and Fitch Ratings said last month.
The BSE India Sensitive Index has declined 7.3 percent during the past year and trades for 15 times earnings, down from a peak of 26 times in 2009. ICICI Bank, based in Mumbai, is valued at 1.7 times net assets, compared with a five-year average of 2.2, data compiled by Bloomberg show. Fitch cut its outlook on Indian financial companies, including ICICI Bank and State Bank of India, to negative from stable on June 20.
Low interest rates around the world will buoy growth in the BRIC countries, said O'Neill, the former chief economist at Goldman Sachs Group Inc. The New York-based bank predicted two years after O'Neill coined the term that the countries would join the U.S. and Japan as the world's biggest economies by 2050.
Cheap Stocks
The Federal Reserve has kept its benchmark lending rate near zero since 2008 and last month extended a program to cut long-term borrowing costs by selling short-term securities and buying longer-term debt through December. The European Central Bank will probably cut its main rate on July 5, according to the median estimate of economists surveyed by Bloomberg. China reduced its lending rate last month, while Brazil has lowered its benchmark Selic rate seven times since August.
MSCI's BRIC index jumped an average 48 percent in the 12 months after policy makers began cutting borrowing costs in 2003, 2005 and 2008, according to data compiled by Bloomberg.
The gauge dropped 1.1 percent this year through yesterday, compared with a 4.6 percent gain in the MSCI All-Country index. The BRIC index trailed the global measure in the first half for the fourth straight six-month period, the longest stretch since the data began in 1994.