‘Bric equities are approaching 2008 valuations’

Global emerging markets (Gems) and the Bric countries of Brazil, Russia, India and China in particular certainly felt the effects of global volatility with both equity and debt markets affected.

For the year to February 1, the MSCI Bric index posted a loss of 7.05 per cent, compared with a loss of 4.94 per cent from the MSCI Emerging Markets (EM) index, while the MSCI World produced a slightly smaller loss of 1.97 per cent.

Although emerging market debt seemed to be less volatile, with the JPM EMBI+ index, which tracks returns for actively traded external debt instruments in emerging markets reported an annual return of 9.31 per cent to January 24.

Over the longer term, however, the region’s asset classes have done better with emerging market government bonds producing a return of 60.6 per cent over five years and 60.63 per cent over three years, while emerging market equities returned 28.58 per cent over five years and a strong 107.78 per cent for the three years to January 31.

Jason Hepner, investment director for global strategy at Standard Life Investments (SLI), points out that while there is strong fundamental underpinning for many emerging market countries they are traditionally highly sensitive to market movements in a severe global risk-off environment.

Panicked

“That’s what we had at the tail end of last year when the market was fairly panicked about the eurozone situation, and as normal emerging market equities underperformed most other instruments.

“So all in all it was a bad year for EM equities, in spite of the fundamental longer-term positives that people are well aware of.”

That said, Michael Konstantinov, manager of the Allianz RCM Bric Stars fund, argues that following a market correction last year, 2012 has started with very low valuations for Bric equity markets both on a price to earnings (p/e) and price to book (p/b) ratio.

“In fact all of the Bric countries’ equity markets are now approaching their 2008 lows on both these valuation measures. Current valuation levels reflect extreme bearishness. We believe that barring a global recession such as the one in 2009, we could witness positive surprises throughout this year.

“One key positive for Bric equities is falling inflation, which peaked during the second half of 2011. This provides room for stimulus measures should economic growth slow more than expected. Brazil has already begun this process by cutting interest rates twice, and China has moved its stance from inflation-targeting to supporting growth in 2012.

“Both these moves should create a more supportive macroeconomic environment for equities in 2012 and, hopefully, a positive tailwind that coupled with low valuations, could generate positive returns for equities.”