While economic growth does not always translate into strong equity market performance, the growing demand for goods and services has and will continue to result in a wealth of opportunities for corporations to make big profits.
Many fund managers have promised high returns from the BRIC markets since the phrase was first coined by Jim O’Neill in 2001, and while there is no getting away from the fact that their long-term numbers have been far higher than the world average, performances have stuttered of late.
The question is: will this underperformance continue, or does the recent pull-back present investors with a compelling buying opportunity?
Here, FE Trustnet considers the outlook for each of the BRIC nations, with the help of industry experts.
India
As Jupiter’s Avinash Vazirani told FE Trustnet, India has been an unfruitful place to invest in recently. Over five years, the MSCI India has lost close to 20 per cent while the wider MSCI World has made close to 50 per cent.
Performance of indices over 3yrs
Source: FE Analytics
Waj Hashmi, manager of the Schroder ISF BRIC fund, expects this underperformance to continue for the foreseeable future.
"Obviously, India has been underperforming for some time; however, it is still a very expensive market compared to the other BRICs," he explained. "That is because of the demographic dynamic, so people always want to be invested, because of the long-term potential.”
"India has a consumption-led growth model and they don’t have a manufacturing model like China. However, inflation has remained very strong and they need more external funding. Another issue is that the country has been on political lockdown because of the coalition government, so nothing is getting done," he added.
Although the overall outlook for India may seem depressing, Devan Kaloo (pictured), head of emerging markets at Aberdeen, says he is finding a number of stock-specific opportunities in the country and urges investors to maintain their exposure.
"India is one of our favoured markets," he said.
"If there was ever a market that suited the adage of good companies thriving in poor conditions, then it is India."
"On a broad macro level, a lot of the problems have come from stubborn inflation. Interest rates have had to go up to protect the currency. Yes it may be a painful ride, but ultimately there will be a cyclical upswing," he added.
Our data shows that Indian equities make up 13.1 per cent of Kaloo’s five crown-rated Aberdeen Emerging Markets fund.
China
China has been one of the major talking points from an investment point of view for the last decade, and 2013 has been no different.
Readers have been bombarded with news that the general economy is slowing. More recently there have been grave concerns over the state of the country’s financial system and the rise of the unregulated "shadow banking" sector.
Hashmi believes this slowdown is a painful but necessary process in order for the Chinese economy to evolve and move from an export-driven model to a consumer-oriented one.
"We are overweight China and though there have clearly been concerns over growth, that is something we should be expecting, and shouldn’t be seen as a negative," he said.
"China has gone through a long period of capex-driven growth, which the likes of Japan, Korea and the US have all had to go through in their history. However, that is now normalising. Over time, that re-balancing has to happen."
"Because of that, growth rates will have to go through a transition," he added.
Hashmi holds 44.7 per cent of his $2bn Schroder ISF BRIC fund in China and Hong Kong equities, while his benchmark has 43.5 per cent.
His thoughts are echoed by Kaloo, but he says for the meantime he is happier to access China through companies listed in Hong Kong because he says they tend to be better managed than their mainland counterparts.
"The adjustments the authorities have had to make is very painful and is slowing economic growth. It has also put pressure on certain areas of the market, not least the financial sector," he said.
"However, from a macro standpoint the question is can the authorities deal with slower-than-expected economic growth, as they will not want any social pressures starting to come through."
Richard Titherington, head of emerging market equities at JP Morgan, agrees that opportunities in China will become more apparent in the coming months and says that the country is his largest overweight.
"Currently the Chinese government is committed to a longer-term rotation of the economy away from its heavy reliance on investment and towards a more balanced, more consumer-led growth path," he said.
"They have been successful so far in beginning to moderate the investment 'kicker' to growth."
"This rotation over the past couple of years away from the over-reliance on investment will be a long-term positive, but in the shorter term it has created some disappointment as the government’s attempts to rein in potential bubble areas have limited growth upside," Titherington added.
Brazil
Brazil, like a lot of the emerging markets, has been hit by falling commodity prices, the slowdown in China and a strengthening US dollar in recent times.
According to FE Analytics, the MSCI Brazil index has lost 3 per cent over five years, while the MSCI Emerging Markets index has returned 35.32 per cent and the MSCI World has made more than 50 per cent.
Performance of indices over 5yrs
Source: FE Analytics
Kaloo says there are obvious risks surrounding the country, but that the outlook for certain areas of the Brazilian equity market are now looking positive.
"We are fairly constructive on Brazil," Kaloo explained.
"There are a lot of Brazilian companies that hold their shareholders in high regard, have made good returns on capital and have effectively cut costs. The slowdown in Brazil has been a couple of years in the making and I think interest rates will come back down again eventually."
"In the meantime, however, the tough conditions have created better quality companies," he added.
As Kaloo points out, Brazil is one of the largest regional weightings in the Aberdeen Emerging Markets fund, with Banco Bradesco and Ultrapar featuring in its top-10 holdings. Titherington says that upcoming global sporting events will make Brazil an attractive investment destination in the medium-term.
"We think Brazil will be a big investment story in 2014 on the back of the World Cup and the economic growth and activity that it will bring," he said.
Hashmi is not so optimistic. He takes a top-down view and says that the slowing economy will dampen returns of the wider market.
"We are underweight Brazil. Though valuations are fine, it is the fact that growth continues to disappoint and expectations keep coming down," he said.
"Part of the issue is that inflation has remained sticky. There had been strong real wage growth, but due to the hiking up of interest rates, that has started to come down and could now even be negative," he added.
He also believes that the current account deficit and falling commodity prices/stronger dollar will continue to put pressure on Brazil in the near-term.
Russia
Hashmi is more confident about Russia and is overweight the country.
"It’s a simple story, as the economy’s biggest driver is the oil price. It affects liquidity, domestic consumption, earnings and the fiscal situation. That dependency has grown as there are now more constraints on the supply side – which is good news," he said.
Hashmi favours Russian equities, which he says are extremely undervalued. He adds that there has been a lack of investment into Russia in the past; however he feels that if the authorities make good on their promises over financial reform, the region offers huge growth potential.
Titherington (pictured) says that Russia is not only attractive from a capital growth point of view, but for income investors as well. "In the case of Russia, the market is trading below the low end of the historical band," he explained.
"In Russia in particular, significant dividend payouts by companies in coming weeks should help support the market and we are overweight the region in JPM Emerging Markets Income."
"Russian companies have always had the ability – what is changing is the willingness. Last summer the finance ministry proposed that government-controlled businesses should pay out at least 25 per cent of earnings."
"Today, the dividend yield on Russian equities is already higher than the average for EM and this is set to grow as payouts rise to 25 per cent," he added.
Russian equities make up 7.5 per cent of Titherington’s JPM Emerging Markets Income fund, while the benchmark weighting is 5.8 per cent.
Kaloo is not convinced by the case for Russia. Although he agrees with both Titherington and Hashmi that the overall market is cheap, he warns that top-quality companies are already fairly priced.
"The market does look cheap from a broad-brush sweep," he said.
"However, large parts of the market that look cheap from a P/E or P/B ratio are influenced by oligarchs, pricing manipulation and poor corporate governance. However, sectors such as financials and consumer goods companies are not so cheap compared with the rest of the emerging markets."
"We are less excited about Russia because we feel there is less of a choice of companies to invest in," Kaloo added.
