Building a Better BRIC-Trap

In a 2003 research paper Goldman Sachs argued thatthird of China’s people drink substandard
the combination of countries Brazil, Russia, India andwater and a third breathe badly polluted air, according
China (BRIC) has the economic potential to be largerto Pan. “True, China has made the kind of
than the G6 in US dollar terms by 2050. Theeconomic advances in three decades that required
countries are forecast to encompass over 40% of100 years in Western countries. But China has also
the world’s population and hold a combinedsuffered a century’s worth of environmental
GDP of nearly $15 trillion dollars. Goldman predictsdamage in 30 years.”
China and India will be dominant global suppliers ofChina can no longer neglect this problem as it is
manufactured goods and services and that Brazil andcosting the country an estimated 10% of GDP every
Russia will be dominant suppliers of raw materials.year. That equates to more than US$200 billion a
Brazil and Russia would form logical commodityyear. Also the impact of pollution on human health
suppliers to China and India; cooperation amongst thehas become more obvious and is leading to social
four countries would create a powerful economicunrest of affected citizens. In a report released in
block.June of 2006, Zhu Guangyao, deputy chief of the
Although the relationships are logical, it is not aState Environmental Protection Agency stated that
no-brainer that the potential will be realized. Take a“The Chinese government will mobilize all
look at these headlines.forces available to solve the pollution problems that
- 3/06 Radio Free Europe - Russia/China:are causing serious harm to people’s
‘Partners’ Struggle With an Unequalhealth.” In other words, serious dollars will be
Relationshipthrown at this problem to the tune of $125 billion.
- 4/05 Economist - Brazil and China: Falling out of loveThe authorities plan to spend about $125 billion over
- 10/05 Wall Street Journal - Brazil Regrets its Chinathe next five years to improve water supply and
Affair However, these opportunities are too great towaste water treatment, according to recent reports
not find common ground.in the official media. More than $43 billion has been
- 7/06 Chinese Gov.cn - Year of Russia in China helpsearmarked for sewage treatment plants in urban
deepen strategic partnership of cooperationareas.
- 9/06 Embassy of the People’s Republic ofChina’s problem is much larger than the other
China in the US – Top Chinese legislator hailsBRIC countries, but they are facing similar issues. I
China-Brazil economic relations. China and Brazil willbelieve that the following companies will be major
meet their goal of bringing bilateral trade to 20 billionbenefactors from this clean-up effort.
dollars in 2007.Veolia Environment (VE) is world leader in
- 11/06 China Daily- China, India trade to hit US$20benvironmental services operating in four
this year. Bilateral trade between China and India iscomplementary segments: water management,
expected to hit US$20 billion this year, fulfilling thewaste management, energy management and
target set by both governments two years ahead ofpassenger transportation. In January, it won its 21st
schedule Each country is acutely aware of thecontract in China. It operates in 19 of the 34 Chinese
potential benefits, so these relationships will beprovinces serving the water needs of 20.59 million
handled with care.people. The company is also very active in Russia.
Investors who have recognized this opportunity haveSince 1991 Veolia Water has had a majority stake in
profited. An equal-weighted basket of ETFs“Saint Petersburg - Pure water”, a
representing each country - Brazil (EWZ), Russiacompany specializing in research into leakage from
(TRF), India (IFN) and China (FXI) returned over 45%municipal water supply networks. In 2002 Veolia
last year. Significantly outperforming the MSCIWater became the leading international water
Emerging Markets ETF (EEM, +24%) which includes allservices company operating in Russia from Moscow
of the emerging market countries. This has Walland currently from St. Petersburg.
Street feverishly creating new products to captureSUEZ (SZE) provides equipment and services that
this trend. Claymore introduced the first BRIC ETFprotect the environment worldwide. Its activities
last fall (EEB) that tracks liquid U.S. exchange-listedinclude drinking water production and distribution,
ADRs and GDRs. However, is Claymore’swaste water collection and treatment, and waste
allocation of 49% Brazil, 31% in China, 14% India andtreatment and recovery. The company operates 20
6% the ideal allocation? Last year Claymore’sjoint ventures in China. These joint ventures treat or
allocation missed much of Russia’s gains asmanage water distributed to 13.5 million people in
the Russian ETF (TRF) returned 62%.major cities including Shanghai.
Individual investors no longer have to wait on WallCompanhia de Saneamento Basico do Estado de Sao
Street’s products. Low cost brokers andPaulo (SBS) is the Americas’ largest water
basket trading have made it financially feasible andutility and #3 worldwide. The company provides
practical to create your ownwater and sewage services in the territory of the
“pseudo-ETF.” Read my article on lowstate of Sao Paulo, Brazil to residential, commercial,
cost basket trading for more details.industrial, and governmental customers. It distributes
Currently, I am using two pseudo-ETFs to invest inwater to approximately 22.6 million people and also
the BRIC theme. The first is composed of stocksprovides sewage services to approximately 18.3
that provide raw materials and supplies necessary formillion people.
the industrialization of the BRIC economies. TheCovanta Holding Corporation (CVA) is the fourth and
second is simply an equal-weighted basket of EWZ,final company in the environmental segment of the
TRF, IFN and FXI. I prefer this approach versus thebasket. The company, through its subsidiary, Covanta
Claymore, since I can control the allocations. So, ifEnergy Corporation, engages in the development,
you only want broad exposure use the Wall Streetconstruction, ownership, and operation of
products or a variation similar to mine.infrastructure for the conversion of waste-to-energy
That being said, I am in the process of reconstructingand independent power production in the United
the second method. I believe in the long run moreStates and internationally. Covanta has a long history
upside will be realized by addressing specific problemsin China and just recently announced a joint-venture
facing the BRIC countries as opposed to thepartnership with Chongqing Iron & Steel to
broad-brush approach. So, the second ETF will beparticipate in China’s rapidly growing
composed of stocks that address two majorwaste-to-energy market.
problems facing the BRICs – pollutionThese four stocks will form the one pillar of the
management and logistics/transportation. I willrevamped BRIC “pseudo-ETF.” The
address logistics and transportation in a subsequentother pillar will be comprised of stocks in the logistics
article.and transportation sectors. Why those sectors? By
Pollution Management:some estimates, logistics accounts for 40 per cent of
China’s rapid economic growth has had somethe cost of goods sold and four-fifths of
very costly unintended consequences. Pan Yue, viceproduction-cycle time in China. This compares with
minister of China’s State Environmentalaround 10 per cent of the cost of goods sold in the
Protection Administration, summed up the problem, inUS. The antiquated logistic approaches combined with
a November 2006 commentary republished in thethe fractured highways / railways and primitive
Wall Street Journal, that “China is dangerouslymodes of transpiration are tremendous opportunities
near a crisis point” with its environment. Afor efficiency improvements.