Global managers unfazed by lower BRIC returns

Wednesday, 12 January 2011 00:01 - - {{hitsCtrl.values.hits}}

Global investor fancy for stocks in the BRIC (Brazil, Russia, India and China) markets waned a little in 2010, but fund managers say that this is only a blip in a secular bull market.

After delivering stellar returns in 2009, BRIC countries saw their stock markets underperform in 2010. Brazil’s Bovespa and Russia’s RTS Index gained 142 and 128 per cent respectively in dollar terms while the Indian and Chinese benchmarks gained between 80 and 90 per cent. All four indices featured among the top 15 gainers of 2009.

In contrast, 2010 returns were much more muted with the Sensex and Russian RTS Index gaining 22 per cent and the Shanghai Composite Index closing 11 per cent lower. The MSCI BRIC index has underperformed the MSCI emerging market and the MSCI World index last year.

Asked about the reason for lower returns from BRIC stocks in 2010, Dr Mobius, a renowned investor, told Business Line in an exclusive e-mail interaction: “If we look at the last 10 years, the BRIC markets had an average annual return of 28.6 per cent compared to 22.6 per cent for emerging markets. Given the strong performance in 2009 (too), we should expect some consolidation in 2010. The main reason for underperformance in 2010 was China, where signs of too rapid growth and rising inflation resulted in the central bank raising interest rates and government mandated curbs on bank loans. It seems rather ironic that during a period when America and Europe were both struggling to show economic growth, China had to take measures to curb growth.”

Other BRICs also grappled with domestic concerns that yanked back their stock indices.

The Presidential election of 2010 in Brazil, summer heat wave in Russia and flurry of scams in India too affected their respective equity markets, as did runaway inflation.

Trevor Greetham, Asset Allocation Director at Fidelity International, writes in his global outlook for 2011, “Stocks in emerging markets are also likely to do well as long as the authorities are not forced to tighten too much. Ironically, a strong recovery in the developed economies could create the conditions for a correction in emerging market stocks.”

However, investors such as Dr. Mark Mobius believe that 2010 was an aberration.

“We believe BRIC equity markets are in a secular bull phase, and we expect this trend to continue into 2011. There may be corrections along the way, but short-term corrections may provide investors with appealing entry points if valuations drop to attractive levels.”

He supports this view with the assertion that over the longer term, markets should reflect the strong economic growth in those countries. “We expect both China and India to register GDP growth in excess of 8.5 per cent while Brazil and Russia should see growth of close to five per cent. This compares favourably to an expected GDP growth rate of about four per cent for emerging markets excluding the BRICs.

“Most important for us, as value investors, current valuations in BRIC markets, despite having risen from the lows of early 2009, remain more attractive than those in developed markets. We thus continue to be able to selectively find what we believe to be attractively valued stocks on an individual basis across most BRIC countries.”