Off the Wall; An undiscriminating stampede raises an old question: what's the difference between the 'BRICs'?(Brazil, Russia, India and China)

Byline: George Wehrfritz (With Mac Margolis in Sao Paulo, Akiko Kashiwagi in Tokyo and Sonia Kolesnikov-Jessop in Singapore)

When Alan Skrainka discovered India back in 2004, its top companies were a bargain. As chief market strategist for Edward Jones investments, he started buying when the average share on Mumbai's main Sensex Index traded at roughly 12 times earnings. By the time Skrainka started selling in April, the hype about India had pushed share prices to near 20 times earnings on the logic that "you're crazy if you don't put a pile of money into emerging markets," he says. Why did he cash out when he did? "Amateurs listen to stories," he says. "Pros do the math."

Too few people have been crunching numbers on the world's biggest emerging markets. Known collectively as the BRICs (Brazil, Russia, India and China), they hit a wall in the past two weeks, following a dizzying rise that peaked in the first quarter, when emerging markets attracted more than half of all the money flowing into mutual funds in the United States, Europe and Japan. Two factors stand out in the bearish turn: one, that the markets (and this goes for commodities as well as countries) that did best in the run up got hit hardest in the sell-off. And two: this mass movement seems to mock the notion that global investors have, since the crises of the late 1990s, learned to discriminate between, say, China and India or Russia. "Yeah, right," says Charles Biderman, who tracks money flow into global markets as founder of TrimTabs Investment Research.

The mob mentality is alive and well. Biderman says he has seen $500 billion shift from U.S. markets into foreign equities since November 2004, and the only precipitating cause he can identify is the warning that month from "some fellow named Warren Buffett" that U.S. stocks should be avoided. He cautions that this half trillion is the source of the recent boom--and if it flees, it could be the source of a coming bust. Indeed, according to many forecasters, the retrenchment isn't over yet: with inflation rearing its head and interest rates rising in rich nations, the need to chase returns in poorer ones is declining. "Now," says Mark Mobius of the Templeton emerging market funds, "you gotta look at the differences."

So far, the biggest cracks in the BRIC wall have appeared in India. The downturn exposed a key flaw "that was bound to get found out in any bout of weakness," says Sean Darby, head Asia strategist for Nomura International in Hong Kong. The problem, in a word: debt. India's huge fiscal deficit (7.7 percent of GNP, versus 1.4 percent in Brazil and 2.5 percent in China and a surplus in Russia) was too often ignored during the BRIC hype. That has left credit tight in a market where local investors have been borrowing (far more heavily than in the other BRICs) to buy stocks on margin. Nomura warns in a report issued last week that most investors are unaware that the degree of financial leverage in the Indian market has mushroomed by a factor of four in the past 20 months, and are therefore blind to the risk of what might happen if cash-poor investors have to sell stock to pay off their debts. Nomura says that in India, a "death spiral" similar to the one that rocked Asian markets in the crisis of 1997 is a "distinct possibility."

That scenario--the threat that margin calls could precipitate a market stampede--loomed on May 22, when Mumbai's Sensex Index plunged 10 percent in a matter of hours. The Reserve Bank of India responded with an emergency announcement that settlements between banks and the stock exchange were functioning "smoothly" and ...