Should investors be looking beyond the four major Bric countries of Brazil, Russia, India and China to lesser known regions?
Emerging market equities have underperformed the world index between April 2010 and April 2013.
Over the last three years the MSCI World Index rose 26.21 per cent but over the same period the MSCI China is up 0.04 per cent, the MSCI Russia is down 4.3 per cent, the MSCI India is down 11.15 per cent and MSCI Brazil is down 19.34 per cent.
Looking at more short-term performance, the Brics have failed to capitalise on the recent bounce in world markets.The MSCI Emerging Markets index rose 4.56 per cent over the first quarter, compared with the 14.45 per cent gain in the MSCI World index.
Despite the poor performance the big four are impossible for investors to ignore. The Brics account for 25 per cent of global GDP and 40 per cent of the world’s population.
Duncan Lawrie Private Bank director and head of research Edward Bland says he has not lost faith in the emerging markets. However he has reduced exposure to Brazil, India and China in the last year. Bland says he does not invest in Russia due to concerns over political interference in companies.
He says: “We are long term investors into the Brics, so we have not lost faith in the Brics because that is where the growth is.”
Bland suggests the current performance issues could be a buying opportunity. He says: “It is when they [Brics] are out of favour that is the entry point and the time to go in. You have got to take a long term view and not be shy of trimming back when they run ahead of themselves.”
Bland highlights that part of the poor performance of Brazilian markets is down to two of its biggest companies, Petrobas and Vale, which are sensitive to commodity prices.
Bland adds that despite the reduction in economic growth expectations, China’s Shanghai Composite index is trading on a one year forward price-to-book ratio of 1.3x which is historically low,even in the context of the financial crisis of 2008. This is against a 10-year average of 2.4x. India’s market PE for next year is 12.5x, versus a 10 year average of around 15.2x.
However, Bestinvest senior research analyst Ben Seager-Scott says the four Bric countries are not looking “particularly appetising” and suggests investors consider other options.
He says: “As a general rule we prefer to go with broader emerging markets exposure than simply the Brics.”
Hargreaves Lansdown senior investment analyst Adrian Lowcock says the four countries have different economic drivers and should not be categorised in the same investment bucket.
He says: “India has a much younger population so the bulk of the population is under working age. China still has the one child policy. There will be a turning point in China where that changes the demographics, the population is much older.”
Both Scott and Lowcock point to other global emerging economies worth considering, such as those in the Association of Southeast Asian Nations (Asean) group.
Scott says: “The Asean group of countries or the likes of Chile and Mexico have more attractive growth prospects than the big four ‘anchor’ economies.”