Wednesday, 7 December 2016

Back to BRIC?

Coined by former Goldman Sachs chief economist and ex-UK government minister Jim O’Neill in 2001, the BRIC bloc of Brazil, Russia, India and China was supposed to represent the fastest-growing emerging economies outside of the G7 group of western developed economies.  Yet the investment case for the feted BRIC economies has been overshadowed in recent years by the poor performance of the Brazil and Russia equities markets. While Chinese and Indian markets have continued to deliver strong returns, sanctions-hit Russia and politically turbulent Brazil have lagged their counterparts.
Over the past three years, the MSCI India index has generated a return of 52.70% and the Chinese index is up by 32.28%.  Brazil, meanwhile has managed just 0.20% growth and the Russian index is down by -1.54% during the same period.
However we may be about to see a shift.  In its outlook for the G20 group of advanced economies, the OECD has forecast real GDP growth of 7.6% for India and 6.4% for China in 2017. After difficult years for the Russian economy following the imposition of sanctions, real GDP is expected to expand by 0.8% during 2017, and Brazil too is expected to emerge from the economic doldrums with flat growth after difficult years for the South American economy.
Sentiment toward emerging markets continues to become more positive as many investors look for higher yields and the risk perception toward the asset class improves.  A rebound in emerging-market currencies, easing concerns about a hard landing in China, attractive valuations and robust economic fundamentals in many economies are some of the factors that have continued to support the performance of emerging markets.  GDP growth in many countries has also been slowly improving, and over the next few years, countries like Russia and Brazil could see the biggest relative improvements.
As two of the largest and fastest-growing economies of the BRIC bloc, China and India continue to offer many opportunities to investors.  Three funds in the Investment Association universe have at least 25% exposure to India and China and have outperformed the MSCI BRIC index over the past three years.  Fidelity’s £878m Emerging Asia fund – which has a 31.1% weighting to China and 34.7% of its portfolio in Indian stocks – has returned 50.84% over three years. 
Of the dedicated BRIC funds in the IA universe, the HSBC GIF BRIC Markets Equity fund has been the best performer over the past 12 months, delivering a return of 43.44%, compared with a 24.49% rise for the average IA Global Emerging Markets fund.  However, the HSBC fund had a poor 2015 making a loss of 17.77% compared with a fall of 13.46% for its composite benchmark. It has an annualised return of just 0.82% over three years.  The $765m (£614.6m) Templeton BRIC fund has returned an impressive 33.08% over the past year. Yet, the fund also struggled in 2015 after reporting a 10.25% loss, compared with only a 8.23% contraction in the MSCI BRIC index.  It would seem that historical highs within BRIC markets have been short lived.

So why is now the right time for investors to return?  Well there are a number of reasons.  The recent rise in commodity prices, a cautious US Federal Reserve  boosting emerging market currency strength, post-recession leading to improved economic stability (Russia and Brazil), and increasing political momentum in key EM economies all suggest now could be an opportune time for investors.  No question that some of the volatility and uncertainty will remain, but on balance the future for these emerging markets has to be bright.  Relative to stocks in developed countries both on valuation and risk basis, companies in Asia are at the bottom of the earnings cycle and expected by many to deliver better earnings growth in 2017.

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