A bumpy ride but Brics stay strong

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.”

EMs are still relatively cheap and have been surging from a low base following the end of the commodities supercycle from 2001 to 2014 Jon Wingent, Lloyds Private Bank

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. 

“With oil stability and rapidly falling inflation, the central bank could start cutting rates faster than anticipated, spurring growth. The elephant in the room is, of course, the geopolitical situation and, if one can fathom that, then the rest is easy.”

Investors were excited at the prospect of change in India when Narendra Modi became prime minister but some have lost interest as the sweeping reforms anticipated did not materialise quickly.

Mr Annalingam points out: “There are real reforms being implemented by prime minister Modi, the mainstay of which is the bill creating a unified tax system. What was a huge, fragmented market transforms into a common market. This is the first large reform to occur after two years of trying and, combined with a shrinking current account deficit, fiscal deficit and the favourable demographics, creates great growth opportunity.”

He also believes the government is committed to market reform after giving the central bank greater independence.

The surprise outcome of the US election may yet renew fears among investors about emerging markets, including the Brics, as it remains unclear which are least likely to suffer under Donald Trump’s tenure. Nevertheless, as a long-term asset allocation in a portfolio, the investment case appears strong. 

Ellie Duncan is deputy features editor at Investment Adviser