Emerging Markets  

A bumpy ride but Brics stay strong

This article is part of
Guide to Emerging Markets - November 2016

A bumpy ride but Brics stay strong

The Bric economies of Brazil, Russia, India and China have been held up as leading lights of the emerging market investment universe, appearing to exceed the growth rates of other emerging markets. But it has been a bumpy ride. 

In the past 12 months to November 10, the MSCI Bric index has outperformed most other major regional indices, up 32.3 per cent in sterling terms, just ahead of the MSCI Emerging Markets index which rose 30.2 per cent and beating the FTSE 100 which managed a 13.4 per cent rise.

Mihir Kapadia, chief executive of Sun Global Investments, says: “The idea of a Brics economy has been a significant feature of the past two or three decades and has been shaping a new world economy with the rapid, sustained growth of China and now India. With a slowdown in developed economies in Europe and America, the market expected the Bric nations to progress greatly.”

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Mr Kapadia points out between 2000 and 2008 the Bric countries accounted for 30 per cent of global growth, compared with just 16 per cent in the 1990s.

However, he acknowledges that recent political turmoil in Brazil and corruption fears in Russia have slowed market activity in those two countries. He believes India and China, two of the fastest growing countries in the world, look “more promising”.

Many investors still believe China is in for a ‘hard landing’ after years of rapid economic expansion, while others just think its slowing GDP growth is to be expected. 

Any investor considering these four economies should be aware the Bric grouping can be misleading – they all have differing characteristics and some investors include South Africa.

Jon Wingent, head of portfolio specialists at Lloyds Private Bank, notes: “While some indices such as MSCI still group the Brics together, their correlation has widened in recent years and many investors will look at emerging markets separately.”

He observes that, year to date, the MSCI Brazil index has returned 54.6 per cent, while China has returned 1.9 per cent. He admits: “China is going through a transitional period. There are concerns about the housing market, which has risen rapidly in recent months. Nonetheless there remain opportunities for investors, particularly for companies benefiting from a growing middle class of consumers.”

Emerging market countries in general have bounced back this year, helped by a rebound in the oil price, reigniting investor interest. Mr Wingent suggests there is also another reason for the renewed interest in the asset class – value.

“EMs are still relatively cheap and have been surging from a low base following the end of the commodities supercycle from 2001 to 2014,” he says. 

For Ammalan Annalingam, chief risk officer at Signia Wealth, the two most interesting emerging markets are India and Russia – the latter perhaps often overlooked by investors because of its heavy reliance on oil.

He explains: “Russia’s real attraction comes from its fundamentals. In a world where valuations are stretched, Russia’s cheap on a price-to-earnings basis. While the sanctions have hit hard and 2015 growth was -3.7 per cent GDP, the economy is emerging from recession with GDP on track to grow to 1 per cent in 2017.