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Bric alternatives

Gregor Watt and Lee Jones consider the potential of lesser-known emerging markets as doubts arise over the continuing performance of Brazil, Russia, India and China.

In recent years, interest in emerging markets has been driven by the performance and well documented investment potential of the four big Bric economies of Brazil, Russia, India and China.

But with fears of inflation and concerns about stocks being overvalued, many managers are now looking to other less well known markets and are starting to avoid investing in the Bric big four.

A recent briefing note from fund firm Raiffeisen Capital Management says inflationary pressures are already acting as a drag in equity performance in much of the Bric market.

Raiffeisen says: “In contrast to the developed countries, inflationary trends are threatening to take root and strengthen in some of the emerging markets, in particular, in food and energy prices. With the exception of Russia, the Bric countries are in a phase of interest rate increases. In China and Brazil, this has recently weighed heavily on equity prices.”

A look at the stockmarket performance for China and Brazil shows that so far this year these markets have not kept up with the growth of other emerging markets. Since the beginning of January, the Shanghai composite index has fallen from over 3,200 points to 2,635 as at May 26. The Brasilian Bovespa index has seen a drop of 14 per cent from 70,045 to 60,141 in the same time period. Despite the falls in value, there are concerns that China, in particular, is overvalued at present.

M&G global emerging markets fund manager Michael Godfrey says: “We do not have a focus on the Brics at all. When you look at them you have to be careful, investing directly into a country like China where valuations still look fairly expensive, and I do think its corporate governance is well behind other emerging market nations.”

BlackRock is another fund group whose emerging markets managers are looking outside of the Bric economies.

The company says that, based on population size alone, emerging markets generally remain an attractive proposition.

With 86 per cent of the world’s population living in countries that fall within the definition of emerging markets and a rapidly growing working population set to stimulate consumer demand there is potential for growth. Emerging market economies already account for 35 per cent of the world’s GDP but in terms of stockmarket capitalisation it represents only 13 per cent.

BlackRock global emerging markets co-manager Dan Tubbs says rather than looking outside Bric as a defensive measure, many other emerging economies have greater growth potential.

Tubbs says: “The Bric markets are important but there are 18 other emerging markets and a further 25 frontier markets which have enjoyed less investor attention to date. Many of these countries have as good, if not better, growth characteristics than the Bric economies.

“Two key structural drivers we are seeing within emerging markets are the favourable shift in demographics and the rapid growth in domestic consumption, highlighted by the growth in sales of motor vehicles which are 35 per cent above where they were at the start of 2008. In the developed world, motor sales are still well below their 2008 level.”

The markets that are attracting attention include Asia, the Middle East and South America.

Godfrey says: “Beyond the Brics, we think there are lots of opportunities in various places in South-east Asia such as Malaysia, Thailand or the Philippines that investors have ignored for bigger, more exciting things in the Bric nations. But the firms in that part of the world are probably better run and have equally interesting growth prospects.”

First State global emerging markets fund manager Glen Finegan says: “Unless we see a material change in Bric company valuations, which we think are expensive right now, we will be looking to these ’real’ emerging markets such as South Africa, Thailand and even Mexico.”

Tubbs favours South Korea and the Middle East. He says: “Saudi Arabia is an undiscovered opportunity for investors. It benefits from a young and fast-growing population driving domestic consumption as well as a huge government infrastructure spending programme. However, foreign investors still only make up just half a percent of the Saudi stockmarket’s turnover.

“South Korea has a powerful domestic economy which grew 7.8 per cent year on year in the first three months of the year. Its world-class companies, such as Hyundai Motors and Samsung Electronics, are benefiting from strong exports and are gaining global market share.

“Qatar is one the of world’s fastest-growing economies with stronger annual GDP growth than China and is a leading liquefied natural gas producer. It has a population of less than one million, yet has 14 per cent of the world’s gas reserves.”

But fund managers will be keeping an eye on the fortunes of the bigger economies. Finegan says: “If we see Bric prices return to last year’s levels, then I am sure there will be extremely well run companies that we would be very happy to have large positions with.”

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