Are the BRICs still an investment opportunity?

The acronym is said to have been invented by Goldman Sachs as a marketing tool, which means it is not always a helpful grouping for investors.

It stands for Brazil, Russia, India and China – with South Africa sometimes included in the acronym as 'BRICS'.

Jan Dehn, head of research at Ashmore Group, calls the acronym a “sales gimmick”.

“The main common denominator for the BRIC countries is their size. But country size is no indicator of opportunity. Opportunity is a function of the price of assets relative to the underlying risks."

He asserts: “The BRICs go through ups and downs like all other countries and this gives rise to opportunities on a case by case basis.”

Unhelpful label

Gary Greenberg, head of emerging markets at Hermes Investment Management, agrees BRICs is not a particularly useful concept.

While Salman Ahmed, at Lombard Odier Investment Management, notes: “Heterogeneity and differentiation in the emerging market universe has grown over the last few years. 

“The impact and consequences of lower commodity prices is an important indication of this growing reality. Overall, label-based investing in emerging markets is over and we need to treat each country on its own merit.”

Each of the four countries have plenty of differences, they do have one thing in common – they have all been growing this year.

Brazil and Russia have recently exited deep recessions, while India and China continue to exhibit stable growth.Dan Tubbs

Dan Tubbs, head of the global emerging markets equity research and portfolio management team at Mirabaud Asset Management, explains: “GDP growth in GEM [global emerging markets] is improving due to the strengthening BRIC markets, which together account for almost 50 per cent of GEM.  

“Brazil and Russia have recently exited deep recessions, while India and China continue to exhibit stable growth.”

This suggests there are plenty of opportunities for investors who want an allocation to emerging markets in their portfolio.

Scandal ridden or new era?

Taking the first letter in the acronym, Brazil has had a fairly bumpy ride over the past few years, as political scandals often detracted from some of the investment opportunities in the country.

Thomas Smith, manager of the Neptune Latin America fund, explains: “The Brazilian investment case has transformed dramatically over the past 18 months. Back at the beginning of 2016, the market was under pressure from both international and domestic factors. 

“The Chinese economy was slowing which resulted in a precipitous fall in commodity prices, and the US Federal Reserve was beginning to raise interest rates, with the expectation of up to four hikes over the course of the year. 

“In Brazil, populist policies from the Dilma [Rousseff] government were stretching the fiscal accounts and concerns were rising over the trajectory of government debt, while the economy was mired in the deepest recession for decades – over 2015 and 2016 the Brazilian economy contracted by -7.3 per cent.” 

Mr Smith points out: “This all led to a significant depreciation of the Brazilian real, falling by over 60 per cent against the dollar from 2011 to early 2016, a sharp rise in the country risk premium, and credit rating downgrades taking away Brazil’s investment grade status.”

Figure 1: Brazil GDP and Brazil inflation graphs

Source: Neptune Investment Management/Bloomberg

Former President Rousseff was eventually impeached in August 2016, to be replaced by President Michel Temer.

Mr Temer has been passing through a series of reforms in Brazil, including a pension reform, but was recently caught up in a corruption scandal himself, although he is not going on trial and has promised to stay on in office until the end of his term in December 2018.

Now, Mr Smith observes even if there were another political crisis in the country, this would not likely result in an economic crisis or see the Brazilian economy fall back into recession.

“Following the recent correction, Brazil is trading at just under 11 times forward earnings, a discount to emerging markets and in line with its five-year average,” he says. 

“Earnings are recovering from depressed levels following the recession, and if the government is able to continue passing reforms, confidence and investment will continue to recover, supporting the economic acceleration and corresponding pick-up in earnings.”

Russia and oil

The fortunes of emerging market countries are inextricably tied to commodity prices, and Russia is no exception.

Opec, the Organisation of the Petroleum Exporting Countries, has been trying to keep tabs on the oil price by extending production cuts to certain countries, including Russia.

In August this year, the US applied further sanctions to Russia which may be a concern to investors in the region.

But Colin Croft, manager of the Jupiter Emerging European Opportunities fund, says the latest sanctions should not have any significant impact on the Russian stockmarket.

“The Russian economy has already adjusted both to sanctions and the fall in the oil price from around $100 a barrel back in 2014 to the range of $45-55 a barrel we see now,” he observes.

“The economy contracted during 2015-16, but has already returned to growth (+0.5 per cent year-on-year in the first quarter of 2017, with expected full year growth of 1.3 per cent for 2017).”

He believes the oil price is far more important both for the Russian economy and the Russian market than sanctions. 

“The government budget is run on an assumption of an oil price averaging $40 a barrel, so the $45-55 [per] barrel range we see now is a comfortable one for the Russian authorities.

“The Russian market, in my view, is attractively valued and offers good cash returns – its dividend yield is around 5.5 per cent, which compares to just 3.7 per cent for the FTSE All-Share index.”

Mr Greenberg suggests while Brazil, India and China remain interesting long term, “Russia is interesting short term, as the market has realised sanctions are here to stay, the US Congress is aware of the machinations in the electoral process and has voted with a veto-proof majority not to dilute them, and the oil price is depressed. These factors are currently making the market cheap.”

Under Prime Minister Narendra Modi there were high hopes for India and his promised reforms.

For some, the pace of reform has not been quick enough but Michael Hasenstab, chief investment officer at Templeton Global Macro, acknowledges India’s GDP has been “invigorated” under Mr Modi, rising from 5.5 per cent in 2013 before he took office to 7.5 per cent in 2015 and 8.0 per cent in 2016.

According to Mr Hasenstab: “The key to India’s economic future likely won’t depend on what happens to growth over the next few quarters, but instead on whether Modi can continue to push through the types of long-lasting transformational reforms that India needs, and whether they can meaningfully expand the country’s economic potential.”

He adds: “As fixed-income investors, we think India is at a compelling stage—it has a fiscally conservative government, a moderating but largely resilient economy and a central bank that has brought down inflation and maintained appropriate rates. 

“These are strong conditions for bonds and we continue to see attractive valuations across India’s local-currency markets.”

India is quickly moving up the growth ladder to become the world’s fourth largest economy within five years, adding new investment opportunities as EM contributes approximately a substantial 70 per cent to global output growth, still led by China.Uday Patnaik

Uday Patnaik, head of emerging market debt at Legal & General Investment Management, observes: "India is quickly moving up the growth ladder to become the world’s fourth largest economy within five years, adding new investment opportunities as EM contributes approximately a substantial 70 per cent to global output growth, still led by China."

Of the BRICs, that leaves China, which has confounded investor fears of a hard landing, and has grown to become the second largest economy in the world.

While a hard landing is yet to materialise, investors have expressed concerns about the levels of debt in the country.

Debt burdened China

Liontrust’s head of Asia income, Mark Williams, reasons: “China has grown its debt far too fast recently, but the structure is odd in that it is largely loans from government controlled entities, to government controlled entities. 

“This means reorganising the debt burden should be easier than in a less centrally controlled environment. It does not avoid having multiple vested interests which will strive to protect their positions.

"Nor does it mean that you want, as an investor, to be gambling on which side of those battles will dominate. 

“It does, however, mean an imminent financial crisis is pretty unlikely.”

Joep Huntjens, head of Asian fixed income at NN Investment Partners, notes China contributes approximately 40 per cent to global growth and claims its “ability to turn on the credit taps during the [financial crisis] in 2008 helped to cushion the global downturn”.

What shape is it in today, 20 years on from the Asian financial crisis?

He confirms: “China appears serious about deleveraging. The likelihood of near-term interruptions has been reduced after China announced that the economy expanded at 6.9 per cent in the second quarter, surpassing the government’s 6.5 per cent annual growth target. 

“President Xi Jinping is also readying for China’s five-yearly leadership reshuffle in the fourth quarter of this year, and is expected to consolidate power by appointing his allies to the top positions.

"All this puts China in good stead to sustain the momentum for painful but necessary structural reforms.”

eleanor.duncan@ft.com